-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R3V5Cz9LhUmNSkY8l1WgwYJz3+01AlF6LETZgyDt0BatKwfHFfIskPxzm3OJ1WT3 RabeAxi0VlzVGWqHt1tBKw== 0000950134-00-002732.txt : 20000331 0000950134-00-002732.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950134-00-002732 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USDATA CORP CENTRAL INDEX KEY: 0000943895 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 752405152 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25936 FILM NUMBER: 585232 BUSINESS ADDRESS: STREET 1: 2435 NORTH CENTRAL EXPRESSWAY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 9726809700 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ----------------- Commission file number 0-25936 ------- USDATA CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-2405152 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2435 N. Central Expressway, Richardson, TX 75080 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 680-9700 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of March 24, 2000, was approximately $79,264,395 based on the sale price of the Common Stock on March 24, 2000, of $14.50 as reported by the NASDAQ National Market System. As of March 24, 2000, the registrant had outstanding 13,164,629 shares of its Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 18, 2000 are incorporated herein by reference in Part III, Items 10, 11, 12 and 13. 2 PART I. ITEM 1. BUSINESS GENERAL USDATA Corporation (the "Company"), is a global supplier of component-based production software that is designed to help customers reduce operating costs, shorten cycle times and improve product quality in their manufacturing operations. The Company's software enables manufacturers to access more accurate and timely information - whether they are on the plant-floor, in the office, or around the globe. The Company's solutions span a wide range of manufacturing processes, from monitoring equipment to tracking product flow, and are designed to integrate seamlessly with customers' existing manufacturing and business software. This combination of product breadth and ease of integration is intended to provide a total plant solution that defines new levels of manufacturing performance and gives customers a distinct competitive advantage. Now in its 25th year, the Company has a strong global presence with more than 45,000 installs located in more than 60 countries throughout the world, 19 offices worldwide and a global network of distribution and support partners. The Company is committed to solving customer problems and increasing productivity in the manufacturing and production environments through technological innovation. The Company's products are noted for high performance, ease-of-use and support of enterprise computing environments. The Company's customers are in a wide variety of industries including; chemical, oil and gas, food, beverage, automotive, aerospace, telecommunications, electronics, transportation and other industries. The Company's family of software products, marketed under the names of FactoryLink, Xfactory, Connector, Analysis and Smart Manager provide a powerful set of software tools and applications designed for users who are technically competent but who may not be experienced software programmers. In the latter part of 1999 the Company formed its new eMake division which is focused on the "make" or production area of the manufacturing supply chain. Through the eMake division, the Company intends to provide a suite of Internet applications that will include a real-time production portal with secure, online shop-floor visibility and an eBusiness trading market designed specifically for manufacturers. The eMake division includes the operations of Smart Shop Software Inc., an enterprise business solution subsidiary of the Company with integrated accounting to shop floor processes for make-to-order small and medium size manufacturers marketed as Smart Manager. The Smart Shop Software unit includes the assets of Smart Shop Software, Inc. (Idaho), which were acquired by the Company in mid-1999. PRODUCTS AND SERVICES OVERVIEW The Company develops, markets and supports component-based software products for customers requiring enterprise-wide, open systems solutions for the manufacturing and production markets. These software products provide customers real-time component-based computer applications that provide interactive, dynamic and graphical interfaces to manufacturing and production operations. These applications collect, consolidate and communicate information about an automated manufacturing process, typically drawn from complex operating sources or from multiple sites throughout an enterprise, and enable the user to interact with and control plant-wide processes. The real-time information provided by the Company's products enables customers to reduce operating costs, improve product quality and increase overall throughput and productivity. The Company's flagship software product, FactoryLink(R), is a manufacturing process solution used to develop custom supervisory control and data acquisition ("SCADA") and human machine interfaces ("HMI") for the supervision and control of a broad range of automated processes. FactoryLink is a real-time application server product that enables manufacturers to connect to plant floor devices, consolidate and process data and communicate the data to decision-makers throughout the manufacturing enterprise. FactoryLink gives manufacturers the accurate and timely production information they need to make effective decisions throughout the enterprise. FactoryLink, as the plant server, is the centerpiece of a real-time data distribution architecture. In mid-1998, the Company introduced Xfactory(R), a manufacturing execution solution ("MES") product which incorporates Microsoft's newest technologies and is built on Microsoft's Distributed Internet Applications ("DNA") architecture. Xfactory enables manufacturing plants to more easily and quickly automate their production processes and is the first visual object modeling MES. In 1999, the Company introduced two new products: USDATA Connector, which enables connectivity to higher level business systems and USDATA Analysis, which provides real-time access to and analysis of a customer's information. 2 3 In conjunction with the purchase of Smart Shop Software, Inc. in mid 1999, the Company acquired the Smart Manager software product with integrated accounting to shop floor processes for make-to-order small and medium size manufacturers. BACKGROUND AND MARKET DEMAND Traditional Enterprise Resource Planning ("ERP") systems have product-centric views of the manufacturing enterprise. These business systems provide decision-makers with an excellent understanding of product attributes including material costs, bill of materials, labor costs and other attributes. However, these business systems generally have no concept of the target process parameters for actually producing finished goods or the actual process parameters and conditions that occurred to generate specific lots of finished goods. Traditional process control systems have an excellent process-centric view of manufacturing. They understand how things are made, target process parameters and material movement. However, process control systems generally do not have any concept of the actual product made - lot numbers, yield, quality attributes, costing information, etc. To make effective and efficient production decisions, both types of information - product and process - must be used. This integration raises a fundamental issue of how to create communication between the disparate nature of business and process control systems. The Company's products are designed to integrate business and process control systems for any production focused enterprise. FACTORYLINK(R) FactoryLink allows customers to collect and monitor data from disparate process control systems. FactoryLink acts as hub for real-time information that may be used by various decision makers interested in the real-time status of the production process. In 1999, a new version of FactoryLink was released that enhances the product's already solid reputation for reliability, scalability and flexibility. To simplify connecting to plant floor devices, the Company includes support for OLE for Process Control ("OPC") in FactoryLink, making it an interoperable server that can collect and distribute data throughout a multi-vendor manufacturing environment. FactoryLink's extensive database connectivity and interfaces to MES and ERP products allow it to function as the automation system hub, much broader than just HMI. Customers can now leverage their existing investments in various HMIs and build an integrated system, thereby eliminating existing islands of automation. The FactoryLink software enables a customer to: o Create easy to use, real-time supervisory control applications that provide dynamic graphical representations of manufacturing and other automated processes; o Design, test and build an automation application without computer programming knowledge through the use of an interactive graphical interface, pull-down menus, mouse-driven, point-and-click commands and fill-in-the-blank configuration tables; o Develop automation applications that are portable and scaleable from low-end to high-end systems; o Deploy completed applications easily and economically throughout an enterprise that may use different types of computer hardware and operating systems; o Provide an upgrade path by allowing easy modification of applications in response to customers' changing business needs; and o Maintain completed applications in an efficient and cost effective manner. FactoryLink's architecture permits the user to pick and choose the exact functionality required for a particular application. It allows the user to design high performance, real-time systems capable of handling large amounts of data. Techniques for exception processing, message compression and high-speed data transfer achieve optimal functionality under this architectural arrangement. In 1998, the Company released Year 2000 ready versions on all major FactoryLink platforms historically supported by the Company, including DOS, UNIX, OS/2, Microsoft Windows, NT and Windows 95. To provide the Company's 3 4 customers with a convenient means to obtain information regarding Year 2000 readiness of its products, the Company has maintained a web site (www.usdata.com) with the latest information regarding Year 2000 readiness for its products, including a statement of what it means when a product is designated as Year 2000 ready. No significant Year 2000 related problems have been reported with the Company's software products with the transition from 1999 into early 2000. Xfactory(R) Xfactory is an MES product, which incorporates Microsoft's newest technologies and is built on Microsoft's DNA architecture. Xfactory enables manufacturing plants to more easily and quickly automate their production processes and is the first visual object modeling MES. Xfactory bridges the gap between the plant floor and ERP systems. The Company develops, markets and supports Xfactory software products for customers requiring enterprise-wide, open systems solutions for production management and leveraging business and planning systems. The Xfactory software product enables customers to develop versatile and flexible MES applications for production management, product tracking, product scheduling, and genealogy tracking for manufacturing and production processes. The information provided by the Company's products enables customers to reduce operating costs, improve product quality and increase overall throughput and productivity. In December 1999, the Company launched the latest release of Xfactory. This latest release, Xfactory version 1.4, enables manufacturers of all sizes to track and improve production processes "on the fly." Version 1.4 is intended to deliver unparalleled performance and reliability for even the most demanding, large-scale, production processes. Xfactory software enables a customer to: o Utilize a fixed data base scheme, where the objects themselves are stored in the same database; o Effectively convert the plant network into an intelligent event routing entity, allowing the customer to effortlessly send and receive local and remote event notifications; o Maintain object-oriented programming that allows base objects to incorporate properties, events and methods, thereby easing the demands of large-scale software development and applying object modeling to the manufacturing plant itself; o Utilize a three-tiered architecture that is intended to provide greater security, optimized client database connections, centralized management, thin clients and distributed processing for greater speed and throughput than is found in traditional single-tiered architectures (Xfactory clients reside on Tier 1, components in the Microsoft Transaction Server on Tier 2 and a client/server relational database on Tier 3); and o To incorporate Xfactory functionality into environments such as Visual Basic, C/C++, Microsoft Office, Oracle Forms and SCADA packages, such as FactoryLink, because Xfactory is component based and Internet compatible. USDATA CONNECTOR In the latter part of 1999 the Company introduced the USDATA Connector product. USDATA Connector links the plant floor to the supply chain and higher-level business systems. USDATA Connector is designed to enable disparate systems throughout the enterprise to operate as one and, in conjunction with the Company's production suite of software, to provide visibility to the status of the customers order at any point in the manufacturing process. In this regard, USDATA Connector assists manufacturers in achieving a real-time supply chain allowing them to better meet changing customer needs and increasing market demands. USDATA ANALYSIS In late 1999 the Company also introduced its USDATA Analysis product. USDATA Analysis turns production data into valuable information available from any web browser. This product is the result of USDATA's intuitive production modeling environment coupled with the capabilities of TopTier Software's hyper-relational technology. USDATA Analysis provides integration of Xfactory data with MySAP.com and Baan Data Navigator capabilities, allowing information to be exported to Microsoft Excel or Access for further manipulation, or to be saved in each user's USDATA Analysis desktop. 4 5 EMAKE SERVICES AND SOLUTIONS The Company established the eMake division to enable eMake to become a premier provider of Internet-based manufacturing software and services from the plant-floor to the executive office, across the supply chain. The Company anticipates that the eMake division will enable B2B real-time visibility, production and commerce. The Company intends to develop and implement an eMake suite of Internet applications that will deliver a real-time production portal with secure, online shop floor visibility and an eBusiness trading market that is designed specifically for manufacturers. The Company expects that its initial focus for the eMake division will be the development and implementation of the eMake Small Manufacturing Edition products, which is designed for smaller make-to-order manufacturers, typically with annual revenues less than $50 million. The Company intends to use the expertise of the Smart Shop Software unit as the core of this offering. The Company also expects to focus the eMake division on the development and implementation of the eMake Production Edition, which is intended to provide solutions to larger manufacturers in the electronics assembly and automotive industries. The Company currently anticipates that the eMake Production Edition will be introduced in late 2000. The Company also intends to provide eMake division customers with a variety of services and solutions, including Internet supply chain connectivity, web browser interfacing, production system management and material resource planning capabilities. MARKETING, SALES AND DISTRIBUTION The Company's sales and support organization includes channel management personnel, a corporate business development group for lead generation, a technical resource group and a network of authorized worldwide distributors that acquire licenses for the Company's products at a discount and remarket and provide training, customer support and consulting services to end-users. The Company's sales and support organization combines its internal resources with the resources, expertise and customer base of qualified third party distributors, remarketers and integrators. The Company's internal sales and marketing organization consisted of 48 persons as of December 31, 1999 and is based in Richardson, Texas. The Company has field sales locations in 19 other cities in the United States and in Belgium, England, Denmark, Germany, France and Italy. The Company goes to market via a network of distributors, referred to as tier one partners ("TOPs"). As of December 31, 1999, approximately 40 such TOPs delivered in excess of 90% of the Company's products to system integrators and the ultimate end-users. This indirect strategy is critical to the Company's success and future growth because each TOP functions as a virtual extension of the Company's sales, service and support. Typically, the business model of TOPs is primarily driven by industrial software revenues and related products. TOPs generally have value-added products and services that are additive to the Company's core products, and TOPs generally work cooperatively with a community of local system integrators that actually perform project work for the end-user. In support of its channel sales efforts, the Company conducts comprehensive marketing programs that include direct mail, public relations, advertising, seminars, trade shows and ongoing customer communications programs. The Company also seeks to stimulate interest in its products and to keep its customers informed of advances in application development technology through demonstrations, promotional seminars, publications, technical notes and newsletters. CUSTOMER SERVICE The Company believes a high level of customer service and technical support is critical to customer satisfaction, especially since many of the Company's customers use its products to develop complex, large-scale applications on which the success of their organizations may depend. The Company has established, and intends to continue to enhance and expand, an integrated, highly skilled channel service and technical support organization. The Company provides first level, localized support through its highly qualified and experienced TOPs. Support engineers are networked utilizing a single knowledge based system that is intended to enable quick and efficient transfer of data, software corrections and up to date technical information. In addition to frequent interaction between the Company's support personnel and the TOPs engineers, the Company also conducts regular training sessions to enhance the technical knowledge and working relationship in this support community. Annual software support agreements are available to customers in various forms. The Company also provides customer support for its products via the web, allowing users access to the latest software fixes, FAQ's (frequently asked questions), detailed examples and on-line trouble shooting/problem submission. The Company also maintains a FactoryLink Certified Integration Partner Program. Members of this program have access to specific vertical market and industry expertise and established relationships with prominent hardware and software. The Company offers comprehensive training classes to customers and third-party remarketers. Training classes are offered through in-house training facilities in Richardson, Texas, in facilities in Brussels, Belgium and through its authorized training TOPs throughout the world. The training curriculum is a comprehensive program of application development training in a hands-on, 5 6 lab-based training environment. The Company is also able to provide on-site training when required by customers. CUSTOMERS Since the introduction of the FactoryLink software product in 1986, the Company has licensed more than 45,000 copies of the product worldwide for use in the chemical, oil and gas, food, beverage, public utility, pharmaceutical, pulp and paper, automotive, aerospace, electronics, telecommunications, water treatment, transportation and numerous other industries. Established end users include Anheuser-Busch Companies, Inc., Ford Motor Company, Goodyear Tire & Rubber Company, Hewlett-Packard Company, Michelin Tire Corporation and Nestle Food Company. In the year ended December 31, 1999, no single end user of the Company's products accounted for more than 10% of the Company's total revenues. Sales to foreign clients (primarily in Europe) continue to be a significant source of revenue for the Company. For the year ended December 31, 1999, the Company realized revenues from its international operations of $13.7 million (51% of revenues), as compared with $12.9 million for the comparable 12 month period (56% of revenues) ended December 31, 1998. Most of the Company's international revenues were derived from sales and services related to FactoryLink software products. See also Note 11 to Notes to Consolidated Financial Statements for additional information on export revenues. The Company has maintained a long-term partner relationship with Schneider Automation. Schneider and its predecessors have been purchasing for resale a private label, OEM version of FactoryLink from the Company since 1989 and accounted for $4.9 million and $4.1 million or 18% and 18%, respectively, of total revenues for the years ended December 31, 1999 and 1998, respectively. The Company's eMake division, including the Smart Shop Software unit, serves a broad base of customers. Over 12,000 client licenses of the Company's Smart Shop Software unit product, Smart Manager, have been installed with make-to-order manufacturers since the introduction of the product by Smart Shop Software, Inc. (Idaho), the predecessor to the Smart Shop Software unit. PRODUCT INNOVATION AND DEVELOPMENT The Company's product development efforts are focused on expanding the Company's portfolio of software products as well as maintaining the competitiveness of its current products, including development of future releases, improvements in the ease of use of its products and creation of new application modules and development tools as well as the development of new products that enable manufacturing performance improvement. The independence of its products from underlying hardware platforms, GUIs, RDBMSs, networks and other technologies and standards gives the Company the flexibility to evaluate a wide range of new opportunities to expand the current scope of its products. The Company's development activities generally are driven by market requirements and to the extent possible leverage known technologies and architectures. The Company's eMake division product development efforts primarily have been focused on the new eMake solutions and services including preparation for application service provider hosting, web-based marketing and fulfillment, and product enhancements. During the years ended December 31, 1999 and 1998, the Company invested approximately $5.4 million and $5.2 million, respectively, in product development including $2.5 million of capitalized software development costs in both 1999 and 1998. In the years ended December 31, 1999 and 1998, the Company expended 11%, and 12%, respectively, of its total revenues on product development, net of capitalized software. The Company anticipates that it will continue to commit substantial resources to product development in the future. COMPETITION The software markets in which the Company participates are intensely competitive and are subject to rapid changes in technology and frequent introductions of new computer platforms and software standards. As a result, the Company must continue to enhance its current products and to develop new products in a timely fashion to maintain and improve its position in this industry. The Company competes generally on the basis of product features and functions, product architecture, the ability to run on a variety of computer platforms and operating systems, technical support and other related services, ease of product integration with third party applications software, price and performance. The Company's FactoryLink product competes with a number of software suppliers, including Intellution, owned by Emerson Electric, GEF Automation, owned by FEF-Fuanuc, Rockwell Software, owned by Rockwell Automation and 6 7 Wonderware Corporation, owned by Siebe plc, as well as large PLC and DCS manufacturers that provide similar software along with their hardware products. The Company's Xfactory product competes with a number of software suppliers, including GR Software, owned by Genrad Corporation, Consilium owned by Applied Materials, Promis Systems owned by Brooks Automation, Camstar Systems Inc., RWT Corporation, as well as smaller software companies that provide similar software. The Company's Smart Manager product competes with a number of software suppliers, including Visual Manufacturing, owned by Lilly Software, Made2Manage, Job Boss Software and Epicor. Additionally, certain businesses develop these types of systems internally. Many of the Company's existing and potential competitors have longer operating histories and significantly greater financial, technical, sales, marketing and other resources than the Company. Certain of these organizations also have greater name recognition and a larger installed product base than the Company. The Company's competitors could introduce products in the future with more features and lower prices than the Company's product offerings. These organizations could also bundle existing or new products with other products or systems to compete with the Company. As the market for industrial automation and process control software products develops, a number of companies with significantly greater resources than the Company could attempt to increase their presence in this market by acquiring or forming strategic alliances with competitors of the Company. Any of these events could have a material adverse effect on the Company's business, prospects, operations and financial condition. BACKLOG The Company typically ships software products within a short period of time after acceptance of purchase orders. Accordingly, the Company typically does not have a material backlog of unfilled orders for its software products, and revenues in any quarter are substantially dependent on orders booked in the quarter. Any significant weakening in customer demand would therefore have an almost immediate adverse impact on the Company's operating results and on the Company's ability to maintain profitability. INTELLECTUAL PROPERTY The Company holds patents in the United States covering control systems that employ the features embodied in its FactoryLink product. The Company has registered its "USDATA," "FactoryLink" and "Xfactory" trademarks with the U.S. Patent and Trademark office, as well as in several foreign countries. The Company regards its software as proprietary and attempts to protect it with a combination of patent, copyright, trademark and trade secret law, license agreements, nondisclosure and other contractual provisions and technical measures. The Company requires employees to sign an agreement not to disclose trade secrets and other proprietary information. The Company's software products generally are licensed to end-users under a perpetual, non-transferable, nonexclusive license that stipulates which modules can be used and how many concurrent controllers may use them. The Company relies primarily on "shrink wrap" licenses for the protection of its products. A shrink wrap license agreement is a printed and/or electronic license agreement included with the packaged software that sets forth the terms and conditions under which the purchaser can use the product and binds the purchaser by its acceptance and purchase of the software to such terms and conditions. In addition, in some instances the Company licenses its products under agreements that give licensees limited access to the source code of the Company's products. The Company believes that existing intellectual property laws and other protective measures afford only limited practical protection for the Company's software. Furthermore, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Shrink-wrap licenses typically are not signed by the licensee and therefore may be unenforceable under the laws of certain jurisdictions. Accordingly, despite precautions taken by the Company, it may be possible for unauthorized third parties to copy or reverse-engineer certain portions of the Company's products or to obtain and use information that the Company regards as proprietary. While the Company's competitive position could be threatened by its inability to protect its proprietary information, the Company believes that, because of the rapid pace of innovation within its industry, factors such as the technological and creative skills of the Company's personnel are more important to establishing and maintaining a technology leadership position within the industry than are the various legal protections available for its technology. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software programs could increasingly become the subject of infringement claims. Although the Company's products have not been the subject of an infringement claim, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not result in costly litigation or require the Company to obtain a 7 8 license to use the intellectual property rights of such parties. In addition, there can be no assurance that such a license would be available on reasonable terms or at all. EMPLOYEES As of December 31, 1999, the Company had approximately 204 full-time employees. None of the Company's employees are subject to a collective bargaining agreement, and the Company has not experienced any work stoppage. The Company believes that its relations with its employees are good. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are elected annually by the Board of Directors and hold office until their successors are elected and qualified. The following persons were executive officers of the Company at December 31, 1999:
Name Age Position - ---- --- -------- Robert A. Merry 50 President and Chief Executive Officer Robert L. Drury 53 Vice President, Chief Financial Officer and Treasurer
Robert A. Merry - Mr. Merry joined the Company in July of 1997 as President and Chief Executive Officer. From 1992 through 1997, Mr. Merry served as President, Process Manufacturing SBU of EDS Corporation. Prior to his service at EDS, Mr. Merry served as Vice President, Sales and Marketing for DTM Corporation, from 1991 to 1992 and as Vice President, North American Operations for Execucom Systems Corporation from 1985 to 1991. Robert L. Drury, - Mr. Drury joined the Company in December 1997 as Vice President and Chief Financial Officer. He was subsequently elected Treasurer and Secretary of the Company in February of 1998. From December 1992 until he joined the Company, Mr. Drury was Chief Financial Officer, Vice President of Finance and Treasurer for Interphase Corporation in Dallas, Texas. From 1988 to 1992, Mr. Drury was Chief Financial Officer at Ben Hogan Company in Fort Worth, Texas. From 1983 to 1988, Mr. Drury was Corporate Controller at Recognition Equipment, Inc. in Dallas, TX. ITEM 2. PROPERTIES The Company leases approximately 50,000 square feet of office space in Richardson, Texas. The lease agreement for this office space was due to expire in 2000. In February 2000, the Company amended the lease to extend the lease term to 2010 and increase leased office space by approximately 30,000 square feet in equal increments by mid-2000 and 2001. The Company leases additional office space in other cities in the United States and in Europe. The Company considers its leased real property adequate for its current and reasonably foreseeable needs. The Company believes that suitable additional or alternative space will be available as needed to accommodate the expansion of corporate operations and additional sales offices. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions incidental to the normal conduct of its business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $.01 per share (the "Common Stock"), has been listed on the Nasdaq National Market since June 16, 1995, under the symbol "USDC." The following table sets forth, on a per share basis for the periods shown, the range of high and low closing prices of the Company's Common Stock compiled from published sources:
High Low ------ ----- 1999: Fourth Quarter 14.94 3.13 Third Quarter 5.56 3.19 Second Quarter 4.13 2.13 First Quarter 4.38 1.94 1998: Fourth Quarter 4.19 1.00 Third Quarter 5.25 2.81 Second Quarter 7.50 4.75 First Quarter 8.44 4.38
As of December 31, 1999, there were approximately 2,800 beneficial holders of record of the Company's Common Stock (which amounts do not include the number of stockholders whose shares are held of record by brokerage houses or clearing agencies but include each such brokerage house or clearing agency as one stockholder). DIVIDEND POLICY To date, the Company has not paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will depend on, among other things, the Company's results of operations, capital requirements, restrictions in loan agreements and financial condition and on such other factors as the Company's Board of Directors may, at its discretion, consider relevant. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information relating to the financial condition and results of operations of the Company and should be read in conjunction with the consolidated financial statements and notes included herein.
Years Ended December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA (in thousands, except per share data) Revenues $ 27,045 $ 22,861 $ 22,381 $ 23,885 $ 24,407 Income (loss) from continuing operations $ (2,416) $ (2,094) $ (3,907) $ (2,650) $ 760 Net income (loss) applicable to common stockholders $ (2,583) $ (3,813) $ (3,690) $ (1,056) $ 1,626 Income (loss) per common share from continuing operations: Basic and diluted $ (0.22) $ (0.19) $ (0.35) $ (0.24) $ 0.08 BALANCE SHEET DATA (in thousands) Total assets $ 26,867 $ 16,401 $ 19,254 $ 21,717 $ 21,116 Long term debt, including current portion $ 450 -- -- -- -- Stockholders' equity $ 14,087 $ 10,295 $ 13,873 $ 16,648 $ 17,331
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW USDATA Corporation (the "Company"), is a global supplier of component-based production software that is designed to help customers reduce operating costs, shorten cycle times and improve product quality in their manufacturing operations. The Company's software enables manufacturers to access more accurate and timely information - whether they are on the plant-floor, in the office, or around the globe. The Company's solutions span a wide range of manufacturing processes, from monitoring equipment to tracking product flow, and are designed to integrate seamlessly with customers' existing manufacturing and business software. This combination of product breadth and ease of integration is intended to provide a total plant solution that defines new levels of manufacturing performance and gives customers a distinct competitive advantage. Now in its 25th year, the Company has a strong global presence with more than 45,000 installs located in more than 60 countries throughout the world, 19 offices worldwide and a global network of distribution and support partners. Revenues have been generated primarily from licenses of the Company's FactoryLink, Xfactory and Smart Manager software and secondarily from technical support and service agreements, training classes and product related services. The support and service agreements are generally one-year, renewable contracts entitling a customer to certain software upgrades and technical support. Support and service revenue represented approximately 11%, 12% and 11% of revenues during the years ended December 31, 1999, 1998, and 1997, respectively. 10 11 Included in the FactoryLink family of products are versions 6.5 and 6.6, real-time information Windows NT and Windows 98/95 platforms, supporting powerful client access environments and technologies and providing Year 2000 ("Y2K") readiness. In addition, the Company offers FactoryLink WebClient, which provides the ability to view and control any FactoryLink server running Microsoft Windows NT using a simple web browser. Xfactory, which was introduced in mid-1998, is a manufacturing execution software ("MES") product that incorporates Microsoft's newest technologies and is built on Microsoft's Distributed Internet Applications ("DNA") architecture. Xfactory enables manufacturing plants to more easily and quickly automate their production processes and is the first visual object modeling MES. The Xfactory software product enables customers to develop versatile and flexible MES applications for production management, product tracking, product scheduling and genealogy tracking for manufacturing and production processes. In December 1999, the Company released Xfactory version 1.4 which gives manufacturers of all sizes the ability to track and improve production processes "on the fly." Version 1.4 is intended to deliver unparalleled performance and reliability for even the most demanding, large-scale, production processes. In August 1999, the Company acquired the business of Smart Shop Software, Inc. (Idaho), ("Smart Shop") which provides business software for make-to-order small and medium sized manufacturers (see Note 2 "Acquisitions"), principally the Smart Manager software product. During 1999, the Company also announced the formation of its new eMake division, which is focused on the "make" or production area of the manufacturing supply chain. Through the eMake division, the Company intends to provide a suite of Internet applications that will include integrated product solutions and real-time visibility across the supply chain. The Company's strategy is to leverage its extensive manufacturing knowledge through Internet applications to help companies maximize their back office production and create the eMake portal for front office visibility into the production operations of the supply chain. Initial product availability is targeted for early to mid 2000 and the Company anticipates that the division initially will focus on horizontal make-to-order solutions for smaller manufacturers and industry solutions for larger-scale automotive and electronics assembly. This division also includes the Smart Shop Software products and operations. The Company focuses its sales efforts through selected distributors capable of providing the level of support and expertise required in the real-time manufacturing and process control application market. The Company currently has seven channel support locations in the United States and six internationally to support its sales efforts through its network of distributors. Effective July 1, 1998, the Company sold its Auto ID hardware integration and servicing business ("Systems Operations"). In conjunction therewith, during the first quarter of 1998, the Company reported a loss of $1.25 million related to the disposal thereof and $469 thousand related to operations through the date of disposal. FORWARD LOOKING STATEMENTS This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding revenues, margins, operating expenses, earnings, growth rates and certain business trends that are subject to risks and uncertainties that could cause actual results to differ materially from the results described herein. Specifically, the ability to grow product and service revenues may not continue and the Company may not be successful in developing new products, product enhancements or services on a timely basis or in a manner that satisfies customers needs or achieves market acceptance. Other factors that could cause actual results to differ materially are: competitive pricing and supply, short-term interest rate fluctuations, general economic conditions, employee turnover, possible future litigation, the impact of Y2K and the related uncertainties may have on future revenue and earnings as well as the risks and uncertainties set forth from time to time in the Company's other public reports and filings and public statements. Recipients of this document are cautioned to consider these risks and uncertainties and to not place undue reliance on these forward-looking statements. See "Business" in Part I, Item 1 of this report for a discussion of other important factors that could affect the validity of any such forward-looking statement. 11 12 RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected statements of operations data as a percentage of revenues:
YEARS ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- Revenues: Product license 85.0% 84.6% 77.6% Services 15.0% 15.4% 22.4% --------- --------- --------- Total revenues 100.0% 100.0% 100.0% --------- --------- --------- Operating expenses: Selling and product materials 65.8% 72.5% 78.9% Product development 10.7% 11.7% 16.0% General and administrative 23.9% 26.1% 32.9% Non-cash compensation 2.4% -- -- Amortization of intangible assets 2.2% -- -- Purchased in process research and development 1.8% -- -- --------- --------- --------- Total operating expenses 106.8% 110.3% 127.8% --------- --------- --------- Loss from operations (6.8)% (10.3)% (27.8)% Other income, net 0.4% 0.9% 1.4% --------- --------- --------- Loss from continuing operations before income taxes (6.4)% (9.4)% (26.4)% Income tax (provision) benefit (2.6)% 0.3% 9.0% --------- --------- --------- Loss from continuing operations (9.0)% (9.1)% (17.4)% --------- --------- --------- Discontinued operations: Income (loss) from discontinued operations -- (1.0)% 1.0% Loss on disposal of discontinued operations -- (6.6)% -- --------- --------- --------- Net loss (9.0)% (16.7)% (16.4)% Dividends on preferred stock (0.6)% -- -- --------- --------- --------- Net loss applicable to common stockholders (9.6)% (16.7)% (16.4)% ========= ========= =========
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Total revenues for 1999 were $27.0 million, an increase of $4.2 million or 18%, compared to 1998. The increase was primarily a result of a $2.8 million increase in software licensing and support revenue related to the Company's USDATA product division, which includes its FactoryLink and Xfactory product lines, as well as $1.4 million of revenues from the Company's eMake product division. North American and international revenues were 49% and 51%, respectively, of total revenues during 1999. North American and international revenues increased 34% and 6%, respectively, in 1999 compared to 1998. Selling and product materials expenses increased $1.2 million or 7% in 1999 compared to 1998. This increase is primarily a result of increased product materials cost of $.3 million, a $.2 million increase in marketing expenses from the Company's USDATA product division and a $.7 million increase in marketing expenses from the Company's eMake product division. Selling and product materials expenses as a percentage of revenues decreased to 65.8% for the year ended December 31, 1999 from 72.5% for the same period in 1998. Product development expenses (net of capitalized software development costs), which consisted primarily of labor costs, increased $.2 million in 1999 compared to 1998. The increase is attributable to eMake development expenses of $.4 million and development efforts for the Xfactory product line, offset by a decrease in contract engineering development activities related to the 12 13 FactoryLink product line. The Company capitalized $2.5 million of development expenses in both 1999 and 1998, primarily related to the next major version of the FactoryLink product. General and administrative expenses increased $.5 million or 8% for the year ended December 31, 1999. This increase is primarily attributable to Smart Shop's general and administrative expenses of $.4 million, which are included in the eMake product division. General and administrative expenses as a percentage of revenues decreased to 23.9% for the year ended December 31, 1999 from 26.1% for the same period in 1998, as a significant portion of general and administrative expenses are fixed in nature. In connection with the acquisition of Smart Shop, the Company recorded $1.7 million in charges, including non-cash compensation of $659 thousand, amortization of acquired intangible assets of $595 thousand and a charge of $476 thousand to write-off acquired in-process research and development. The Company experienced a loss from continuing operations of $2.4 million in 1999 versus a loss of $2.1 million in 1998. The increase in loss from continuing operations was primarily the result of the acquisition related charges of $1.7 million and eMake related costs associated with developing technology, building the infrastructure, start-up and Smart Shop operating expenses. COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Total revenues for 1998 were $22.9 million, an increase of $.5 million or 2% compared to 1997. During 1998, the Company's software licensing revenues increased 11% compared to 1997 and overall unit shipments of software licenses increased at an even greater rate, particularly in products for the Microsoft Windows NT and Windows 95 platforms while products for Unix and other operating systems platforms declined compared to the prior year. The net result of this product mix shift was reflected in lower overall average selling prices (ASPs) for the Company's products which partially offset the positive impact of increased unit shipments. However, during the latter part of 1998 the Company's ASPs began to stabilize as over 90% of all unit shipments were for Windows NT and Windows 95 platforms in 1998 compared to 80% in 1997. Revenues from product related consulting declined substantially from 1997 reflecting the Company's decision to refer nearly all such activity to its channel distribution partners. North American revenues decreased by 22% while international revenues increased 34% in 1998 compared to 1997. North American revenues and International revenues were 44% and 56% of total revenues, respectively. Selling and product materials expenses as a percent of revenues was 72.5% in 1998. Selling and product materials expenses decreased $1.1 million in 1998 compared to 1997 due to decreased product materials costs of $1.4 million as the result of replacement of printed product documentation with compact disk (CD) based product documentation and decreased capitalized software development amortization costs resulting from all such capitalized costs being fully amortized except for development costs related to future unreleased products, offset by an increase in marketing activities resulting from the Xfactory product introduction, demonstration CD's, sales collateral material, as well as seminars and travel related to training activities for the Company's channel partners. Product development expenses (net of capitalized software development cost), which consisted primarily of labor costs, decreased $.9 million or 25% in 1998 compared to 1997. Actual product development expenditures, including capitalized software development costs of $2.5 million in 1998 and $2.2 million in 1997, decreased $.3 million or 5.6% in 1998 compared to 1997. The development of the double-byte functionality supporting the Japanese, Chinese and Korean languages in 1997 was one of the primary factors in the higher level of spending in 1997 compared to 1998. General and administrative costs decreased $1.4 million or 19% in 1998 compared to 1997. As a percent of revenues, general and administrative decreased to 26.1% in 1998 versus 32.9% in 1997. The decrease from 1997 was primarily attributable to decreased provisions for bad debt expenses and organizational restructuring expenses. The Company experienced a loss from continuing operations of $2.1 million in 1998 versus a loss of $3.9 million in 1997. The decrease in the loss from continuing operations was primarily generated by an increase of $1.9 million in gross profit due to improved gross profit margins in combination with increased revenues and a decrease of $2.0 million in operating expenses, partially offset by a significant reduction in the tax benefit resulting from the Company's inability to utilize tax net operating loss carrybacks in 1998 compared to 1997. Discontinued operations incurred a loss of $1.7 million in 1998 resulting from the loss on disposal and the loss from operations until the date of disposal compared to income of $.2 million in 1997. The loss on disposal and from operations until the date of disposal in 1998 were both affected by declining revenues compared to prior years. 13 14 LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided $1.2 million of cash for the year ended December 31, 1999 compared to $.4 million for the same period in 1998, primarily due to improved collections on accounts receivable. Cash used in investing activities was $10.1 million for the year ended December 31, 1999 primarily due to the acquisition of Smart Shop for $6.4 million in cash, plus transaction costs of $.2 million. In addition, the Company invested $1.0 million in capital equipment, primarily computers and equipment, and $2.5 million in capitalized software development costs. The Company received $10.0 million in cash related to the issuance of 1,204,819 shares of its common stock for $5.0 million and 50,000 shares of its Series A preferred stock for $5.0 million. The Company's capital asset requirements are generally funded through internally generated funds. The Company anticipates that capital equipment expenditures will be approximately $1.1 million in 2000. Working capital was approximately $3.1 million at December 31, 1999, compared with approximately $3.0 million at December 31. 1998. On February 8, 2000 and March 24, 2000, the Company received $2.5 million and $2.5 million, respectively, in financings from a wholly owned subsidiary of Safeguard. The Company has not finalized the terms and provisions of these financings. The Company's liquidity needs are expected to arise primarily from funding continued development, enhancement and support of its current and new software products, and the related selling and marketing expenses. The Company is in the process of seeking additional public or private debt or equity financing to fund future growth opportunities or acquisitions. No assurance can be given, however, that such debt or equity financing will be available to the Company on terms and conditions acceptable to the Company, if at all. YEAR 2000 COMPLIANCE The Company has evaluated the Year 2000 ("Y2K") issue and adjusted all known date-sensitive systems and equipment for Y2K compliance. The assessment, remediation and testing phases of the Y2K project are complete. The Company has not encountered any material problems in its critical systems or products subsequent to December 31, 1999 related to the Y2K issue and has not encountered any material problems with its third party vendors and suppliers. The Company will continue to monitor new issues or concerns relative to Y2K. To date, the Company has not incurred any material costs of compliance with Y2K for its internal IT and non-IT computer systems. For primarily operational purposes, the Company had been upgrading PCs and individual applications running thereon throughout 1999, 1998 and 1997. The Company's internal resources performed virtually all of the Y2K readiness issues and the Company plans to use its internal resources to address any issues that may yet arise. Although the Company to date has not experienced any significant problems associated with Y2K, the Company cannot be certain that unexpected Y2K compliance problems of its products, computer systems or the systems of its vendors, customers and service providers, will not occur. Any such problems could have a material adverse affect on the Company's business, financial condition or operating results. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board released Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 137, which is effective for fiscal years beginning after June 15, 2000. Earlier application for certain provisions of this standard is permitted. SFAS 133 establishes accounting and reporting standards for derivative instruments. The Statement requires that an entity recognize all derivatives as either assets or liabilities in the financial statements and measure those instruments at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. SFAS 133 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. 14 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk associated with changes in interest rates relates to its variable rate bank note payable of $276,000. Interest rate risk is estimated as the potential impact on the Company's results of operations or financial position due to a hypothetical change of 50 basis points in quoted market prices. This hypothetical change would not have a material effect on the Company's results of operations and financial position. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of the Company begins on page F-1 of this report. Such information is hereby incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On November 11, 1999, we dismissed PricewaterhouseCoopers LLP as our independent accountants and engaged KPMG LLP as our independent accountants. We have retained KPMG LLP for the current year ending December 31, 2000. Our Audit Committee participated in and approved the decision to change independent accountants. The reports of PricewaterhouseCoopers LLP on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent fiscal years and through November 11, 1999, we have had no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. PricewaterhouseCoopers LLP furnished us with a letter addressed to the Securities and Exchange Commission stating that it agreed with the above statements. A copy of the letter, dated November 15, 1999, is filed as Exhibit 16 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 11, 1999. A representative of KPMG LLP is expected to be present at the annual meeting and will have an opportunity at the meeting to make a statement if he or she desires to do so, and will be available to respond to appropriate questions. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10, Directors and Executive Officers of the Registrant (except for the information regarding executive officers called for by Item 401 of Regulation S-K which is included in Part I in accordance with General Instruction G(3)), is hereby incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders presently scheduled to be held in May 2000, which shall be filed with the Securities and Exchange Commission within 120 days of the end of the Registrant's last fiscal year (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information concerning executive compensation and transactions with management is set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information concerning relationships and related transactions is set forth in the Proxy Statement, which information is incorporated herein by reference. 15 16 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS Independent Auditors' Report for the Year Ended December 31, 1999 F-1 Report of Independent Accountants for the Years Ended December 31, 1998 and 1997 F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-6 Notes to Consolidated Financial Statements F-7 (a) (2) FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts F-19
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (b) REPORTS ON FORM 8-K On October 20, 1999, the Company filed an Amended Current Report on Form 8-K to include financial information relating to a Current Report on Form 8-K on August 16, 1999. On November 16, 1999, the Company filed a Current Report on Form 8-K to announce the Company's change in independent accountants. (c) EXHIBITS Exhibit No. Description 3.1 Certificate of Incorporation of the Company, as amended.# 3.2 By-laws of the Company.* 4.1 Specimen stock certificate representing the Common Stock.*** 4.2 Specimen stock certificate representing the Preferred Stock.# 10.1 1982 Incentive Stock Option Plan.* 10.2 1992 Incentive and Nonstatutory Option Plan.* 10.3 1994 Equity Compensation Plan, as amended.* 10.4 Office Lease Agreement dated as of June 1992, by and between Carter - Crowley Properties, Inc. and the Company.* 10.8 Administrative Services Agreement between Safeguard Scientifics, Inc. and the Company.*** 16 17 10.9 First Amendment to Office Lease Agreement, dated as of June 1992 by and between Carter-Crowley Properties, Inc. and the Company.**** 10.10 Stock Purchase Agreement, dated August 6, 1999, by and between the Company and Safeguard Delaware, Inc.# 10.11 Investors' Rights Agreement, dated August 6, 1999, by and among the Company, Safeguard Delaware, Inc. and Safeguard Scientifics, Inc.# 11.1 Statement regarding computation of earnings per share.# 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP.# 23.2 Consent of PricewaterhouseCoopers LLP.# 24.1 Power of Attorney (included on signature page). 27.1 Financial data schedule. (EDGAR version only). - ------------ # Filed herewith * Filed on April 12, 1995 as an exhibit to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. ** Filed on June 1, 1995 as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. *** Filed on June 15, 1995 as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. **** Filed on March 31, 1998 as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 17 18 INDEPENDENT AUDITORS' REPORT THE STOCKHOLDERS AND BOARD OF DIRECTORS OF USDATA CORPORATION: We have audited the accompanying consolidated balance sheet of USDATA Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USDATA Corporation and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas February 12, 2000 F-1 19 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF USDATA CORPORATION In our opinion, the consolidated balance sheet and the related consolidated statements of operations and comprehensive income, of stockholders' equity and of cash flows listed in the index appearing under Item 14 (a) (1) and (2) on page 16 present fairly, in all material respects, the financial position of USDATA Corporation and its subsidiaries (the "Company") at December 31, 1998 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas February 12, 1999 F-2 20 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 2,962 $ 1,980 Accounts receivable, net of allowance for doubtful accounts of $453 and $1,150, respectively 6,626 6,095 Deferred income taxes -- 533 Other current assets 727 475 ---------- ---------- Total current assets 10,315 9,083 ---------- ---------- Property and equipment, net 2,162 1,825 Capitalized computer software development costs, net 6,645 4,127 Software held for resale, net 1,079 1,286 Cost in excess of fair value of tangible net assets purchased, net 4,742 -- Intangible and other assets 1,924 80 ---------- ---------- Total assets $ 26,867 $ 16,401 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,746 $ 755 Deferred revenue 2,170 2,005 Accrued compensation and benefits 2,226 1,274 Short-term and current portion of long-term debt 62 -- Other accrued liabilities 1,021 2,072 ---------- ---------- Total current liabilities 7,225 6,106 ---------- ---------- Long-term debt, less current portion 388 -- ---------- ---------- Total liabilities 7,613 6,106 ---------- ---------- Commitments and contingencies Redeemable Convertible Preferred Stock, Series A, $.01 par value, with a redemption and liquidation value of $103 per share, 100,000 shares authorized; 50,000 shares issued and outstanding 5,167 -- Stockholders' equity: Preferred stock, $.01 par value, 2,200,000 shares authorized; none issued -- -- Common stock, $.01 par value, 22,000,000 shares authorized; 15,625,951 issued in 1999 and 14,343,550 issued in 1998 156 143 Additional paid-in capital 21,952 16,534 Deferred compensation (1,278) -- Retained earnings 2,523 5,106 Treasury stock at cost, 2,452,316 shares in 1999 and 3,106,184 shares in 1998 (8,434) (10,929) Accumulated other comprehensive loss (832) (559) ---------- ---------- Total stockholders' equity 14,087 10,295 ---------- ---------- Total liabilities and stockholders' equity $ 26,867 $ 16,401 ========== ==========
See accompanying notes to consolidated financial statements. F-3 21 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share data)
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenues: Product license $ 22,990 $ 19,330 $ 17,378 Services 4,055 3,531 5,003 ---------- ---------- ---------- Total revenues 27,045 22,861 22,381 ---------- ---------- ---------- Operating expenses: Selling and product materials 17,784 16,574 17,664 Product development 2,901 2,684 3,574 General and administrative 6,452 5,962 7,372 Non-cash stock compensation 659 -- -- Amortization of intangible assets 595 -- -- Purchased in process research and development 476 -- -- ---------- ---------- ---------- Total operating expenses 28,867 25,220 28,610 ---------- ---------- ---------- Loss from operations (1,822) (2,359) (6,229) Other income, net 114 198 310 ---------- ---------- ---------- Loss from continuing operations before income taxes (1,708) (2,161) (5,919) Income tax (provision) benefit (708) 67 2,012 ---------- ---------- ---------- Loss from continuing operations (2,416) (2,094) (3,907) Discontinued operations: Income (loss) from discontinued operations (net of income taxes of $0, and $112, respectively) -- (219) 217 Loss on disposal of discontinued operations, including operating losses of $250 -- (1,500) -- ---------- ---------- ---------- Net loss (2,416) (3,813) (3,690) Dividends on preferred stock (167) -- -- ---------- ---------- ---------- Net loss applicable to common stockholders $ (2,583) $ (3,813) $ (3,690) ========== ========== ========== Other comprehensive loss: Foreign currency translation adjustment (273) (559) -- ---------- ---------- ---------- Comprehensive loss $ (2,856) $ (4,372) $ (3,690) ========== ========== ========== Earnings per common share: Basic and diluted Loss from continuing operations $ (0.22) $ (0.19) $ (0.35) Income (loss) from discontinued operations -- (0.15) 0.02 ---------- ---------- ---------- Net loss per common share $ (0.22) $ (0.34) $ (0.33) ========== ========== ========== Weighted average shares outstanding: Basic and diluted 11,849 11,196 11,066 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 22 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
Common Stock Additional Subscription Deferred Treasury Stock --------------------- Paid-in Receivable Stock Retained ------------------- Shares Amount Capital from Officer Compensation Earnings Shares Amount --------- -------- ---------- ------------ ------------ -------- -------- -------- Balance, at December 31, 1996 14,343 $ 143 $ 16,282 $ (1,095) $ -- $ 12,609 (3,288) $(11,291) Exercise of stock options 83 240 696 Termination of subscription receivable from officer 1,095 (274) (959) Net loss (3,690) --------- -------- ---------- ------------ ------------ -------- -------- -------- Balance, at December 31, 1997 14,343 143 16,365 -- 8,919 (3,322) (11,554) Exercise of stock options 169 216 625 Net loss (3,813) Foreign currency translation adjustment --------- -------- ---------- ------------ ------------ -------- -------- -------- Balance, at December 31, 1998 14,343 143 16,534 -- 5,106 (3,106) (10,929) Exercise of stock options 12 52 184 Exercise of common stock warrants 78 1 77 (22) (78) Issuance of common stock 1,205 12 5,173 668 2,545 Deferred compensation (1,278) Acquisition of common stock 156 (44) (156) Net loss (2,416) Preferred stock dividends (167) Foreign currency translation adjustment --------- -------- ---------- ------------ ------------ -------- -------- -------- Balance, at December 31, 1999 15,626 $ 156 $ 21,952 -- $ (1,278) $ 2,523 (2,452) $ (8,434) ========= ======== ========== ============ ============ ======== ======== ======== Accumulated Other Total Comprehensive Stockholders' Loss Equity ------------- ------------- Balance, at December 31, 1996 $ -- $ 16,648 Exercise of stock options 779 Termination of subscription receivable from officer 136 Net loss (3,690) ------------- ------------- Balance, at December 31, 1997 13,873 Exercise of stock options 794 Net loss (3,813) Foreign currency translation adjustment (559) (559) ------------- ------------- Balance, at December 31, 1998 (559) 10,295 Exercise of stock options 196 Exercise of common stock warrants -- Issuance of common stock 7,730 Deferred compensation (1,278) Acquisition of common stock -- Net loss (2,416) Preferred stock dividends (167) Foreign currency translation adjustment (273) (273) ------------- ------------- Balance, at December 31, 1999 $ (832) $ 14,087 ============= =============
See accompanying notes to the consolidated financial statements. F-5 23 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (2,416) $ (3,813) $ (3,690) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,687 1,448 2,633 Non-cash compensation 659 -- -- Purchased in process research and development 476 -- -- Loss on disposal -- 1,719 -- Changes in assets and liabilities net of working capital adjustments for acquisition: Accounts receivable 39 (1,522) 2,280 Income tax receivable -- -- 1,050 Deferred income taxes 533 1,083 (1,023) Other - net (108) 74 268 Accounts payable and accrued liabilities 223 387 72 Accrued compensation and benefits 871 319 342 Deferred revenue (765) 748 (309) ----------- ----------- ----------- Net cash provided by operating activities 1,199 443 1,623 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (1,047) (536) (1,263) Acquisition (6,560) -- -- Capitalized software development costs (2,518) (2,549) (2,160) Software held for resale -- (1,345) -- Proceeds from sale of discontinued operation -- 300 -- ----------- ----------- ----------- Net cash used in investing activities (10,125) (4,130) (3,423) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common shares 5,196 794 779 Proceeds from issuance of Series A preferred shares 5,000 -- -- Payments on long-term debt and capital leases (15) (5) (56) ----------- ----------- ----------- Net cash provided by financing activities 10,181 789 723 ----------- ----------- ----------- Cash flows from discontinued operations -- 233 (117) ----------- ----------- ----------- Effect of exchange rate changes on cash (273) (559) -- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 982 (3,224) (1,194) Cash and cash equivalents, beginning of period 1,980 5,204 6,398 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 2,962 $ 1,980 $ 5,204 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 14 $ -- $ -- Income taxes $ -- $ 16 $ 25 =========== =========== ===========
See accompanying notes to the consolidated financial statements. F-6 24 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS USDATA Corporation (the "Company") is a global supplier of component-based production software that is designed to help customers reduce operating costs, shorten cycle times and improve product quality in their manufacturing operations. The Company's software enables manufacturers to access more accurate and timely information - whether they are on the plant floor, in the office, or around the globe. The Company's solutions span the full range of manufacturing, from monitoring equipment to tracking product flow, and are designed to integrate seamlessly with customers' existing manufacturing and business software. This combination of product breadth and ease of integration is intended to provide a total plant solution that defines new levels of manufacturing performance and gives customers a distinct competitive advantage. The Company provides this knowledge through software products and services and delivers it through a community of business partners. The Company has channel support locations throughout the United States and Europe. The Company's distributors have sales locations throughout North and South America, Europe, the Far East and the Middle East. The Company's family of software products, marketed under the names of FactoryLink, Xfactory, Connector, Analysis and Smart Manager provide a powerful set of software tools and applications designed for users who are technically competent but who may not be experienced software programmers. RECLASSIFICATIONS AND BASIS OF PRESENTATION Certain prior year balances have been reclassified to conform to the 1999 presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities in preparation of these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with maturities of three months or less at the time of purchase to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at original cost. Maintenance and repairs are charged to expense as incurred, and the costs of additions and major betterments and replacements are capitalized. Depreciation is provided in amounts which amortize costs over the estimated useful lives of the related assets, generally three to five years, utilizing the straight-line method. Leasehold improvements are amortized over the lesser of the term of the respective leases or estimated useful life of the improvement. CAPITALIZED SOFTWARE Software development costs incurred prior to establishing technological feasibility are charged to operations and included in product development costs. Software development costs incurred after establishing technological feasibility, and purchased software costs, are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Annual amortization, charged to cost of sales, is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the remaining estimated economic life of the product. The total computer software development costs capitalized for 1999, 1998 and 1997 were $2.5 million, $2.5 million, and $2.2 million, respectively. The total costs amortized and charged to operations for 1998 and 1997 were $.4 million and $1.4 million, respectively. No costs were amortized in 1999. F-7 25 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- SOFTWARE HELD FOR RESALE In 1998, the Company purchased the underlying source code for a certain software product, which is held for resale in the ordinary course of business. The original purchase costs of such software were capitalized and are being amortized utilizing the straight-line method over the estimated economic life of three years. Total costs amortized and charged to cost of sales for 1999 and 1998 were $237 thousand and $59 thousand, respectively. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF BUSINESS ACQUIRED The excess of cost over fair value of net assets of business acquired is being amortized on a straight-line basis over a period of 5 years. Accumulated amortization was $427 thousand at December 31, 1999. The Company continually evaluates the excess of cost over fair value of net assets of businesses acquired for indications of impairment based on the forecasted undiscounted cash flow from the related business activity. The amount of goodwill impairment, if any, is measured based upon projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of excess cost over fair value of net assets of business acquired will be impacted if estimated future operating cash flows are not achieved. The Company believes that no such impairment has occurred and that no reduction in estimated useful lives is warranted. INTANGIBLE AND OTHER ASSETS Intangible and other assets includes identifiable intangible assets acquired, consisting of $1.7 million in developed technology, less accumulated amortization of $147 thousand, and $251 thousand in assembled work force, less $21 thousand in accumulated amortization, at December 31, 1999. These intangible assets are amortized on a straight-line basis over the expected useful lives of the assets of five years. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. REVENUE RECOGNITION Revenue from the licensing of software products is generally recognized when the following criteria have been met: (a) a written contract for the license of software has been executed, (b) the Company has delivered the product to the customer, (c) the license fee is fixed or determinable, and (d) collectibility of the resulting receivable is deemed probable. Revenue from software support maintenance agreements is recognized ratably over the contract term, generally not exceeding one year. Sales return rights are provided to certain customers, under specified conditions. Revenues are presented net of estimated returns, which historically have not been significant. STOCK-BASED COMPENSATION In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which gives companies the option to adopt the fair value method for expense recognition of employee stock options and other stock-based awards or to continue to account for such items using the intrinsic value method as outlined under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma disclosure of net income as if the fair value method had been applied. The Company has elected to continue to apply APB 25 for stock options and other stock based awards and has disclosed pro forma net income (loss) as if the fair value method had been applied. F-8 26 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INCOME TAXES Income taxes are accounted for under the asset and liability method. This method results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. FINANCIAL INSTRUMENTS The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of the Company's bank note payable at December 31, 1999 approximates fair value as this note payable bears interest at market rates. NET LOSS PER SHARE OF COMMON STOCK Net loss per share of common stock is presented in accordance with the provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic loss per share excludes dilution for potentially dilutive securities and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings(loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted earnings(loss) per share when their inclusion would be antidilutive. Options to purchase 1.7 million, 1.2 million, and 1.2 million shares of common stock for 1999, 1998 and 1997, respectively, and warrants to acquire 0.7 million, 0.8 million and 0.8 million shares of common stock for 1999, 1998 and 1997, respectively, were not included in the computation of diluted earnings per share as their impact would be antidilutive. FOREIGN CURRENCY TRANSLATION The Company translates the balance sheets of its foreign subsidiaries using year-end exchange rates and translates statement of operations amounts using the average exchange rates in effect during the year. The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive income (loss) in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the statements of operations. CONCENTRATION OF CREDIT RISK The Company licenses software and provides services to established companies. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses. At December 31, 1999, the Company had two customers with outstanding accounts receivable balances of approximately $1.3 million and $1.7 million, respectively. In addition, these customers represented approximately 18% and 6%, respectively, of the Company's revenues for 1999. At December 31, 1998, the Company had one customer with an outstanding accounts receivable balance of approximately $1.2 million. This customer represented approximately 18% and 13% of the Company's revenues for 1998 and 1997, respectively. 2. ACQUISITION On August 6, 1999, the Company completed its acquisition of substantially all of the assets and certain liabilities of Smart Shop Software, Inc. ("Smart Shop") for $6.4 million in cash, plus transaction costs of $.2 million. This acquisition has been accounted for under the purchase method of accounting. The excess purchase price over the estimated fair value of net tangible assets has been allocated to various intangible assets, consisting of developed technology of $1.8 million, assembled work force of $251 thousand and goodwill of $5.2 million, all of which are being amortized to expense on a F-9 27 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- straight-line basis over 5 years. Accumulated amortization at December 31, 1999 was $147 thousand, $21 thousand and $427 thousand, respectively. In addition, $476 thousand of the purchase price was allocated to in-process research and development costs. In-process research and development relates to several of Smart Shop's research and development projects at various stages of development related to Smart Manager 7.0, on which version Smart Shop began development in March 1999. The value assigned to in-process research and development was determined based on management's estimates of the percentage of completion of the underlying development efforts, resulting net cash flows from Smart Manager 7.0 and the discounting of such cash flows back to their present value. The results of the acquired business have been included in the consolidated financial statements since the date of acquisition of August 6, 1999. In connection with the acquisition, the Company also issued 500,000 shares of common stock to certain former shareholders of Smart Shop who became employees of the Company. The shares of common stock are held in escrow as collateral for performance under the purchase agreement and shall be released from escrow to the shareholders in six tranches each six months following the closing date of August 6, 1999. In connection with these shares, deferred stock compensation of $1.9 million was recorded in stockholders' equity. The deferred stock compensation is being recognized as compensation expense over 36 months, as the restrictions lapse. The Company recorded a non-cash compensation charge of $659 thousand for the period ended December 31, 1999 related to the initial amortization of this compensation charge. The following unaudited pro forma information presents the results of operations of the Company as if the acquisition had occurred on January 1, 1999 and on January 1, 1998 and excludes the write-off of acquired in-process research and development.
(in thousands, except per share amounts) Year Ended December 31, ----------------------- 1999 1998 -------- -------- (unaudited) Revenues $ 28,673 $ 25,255 Net loss applicable to common stock $ (3,901) $ (7,544) Net loss per share: Basic and diluted $ (0.33) $ (0.61) ======== ========
3. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, 1999 and 1998 were as follows:
(in thousands) 1999 1998 -------- -------- Equipment $ 6,697 $ 6,151 Software 1,154 1,115 Furniture and fixtures 554 384 Leasehold improvements 42 178 Vehicles 16 256 Assets under capital leases 85 185 -------- -------- 8,548 8,269 Accumulated depreciation and amortization (6,386) (6,444) -------- -------- Net property and equipment $ 2,162 $ 1,825 ======== ========
F-10 28 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4. DEBT In conjunction with the acquisition described in Note 2, the Company, through its wholly owned subsidiary, assumed a promissory note with a bank in the amount of $297 thousand of which $276 thousand was outstanding at December 31, 1999. The note agreement requires monthly installments of $7 thousand including interest at the bank prime rate plus 1.5% (10% at December 31, 1999). The note is collateralized by all accounts receivable, inventory, general intangibles, equipment and fixtures of the wholly-owned subsidiary. The promissory note is guaranteed by the Company and the final payment of the outstanding balance is due in August 2003. Interest paid in 1999 totaled $10 thousand. In connection with the Smart Shop acquisition, the Company assumed a $174 thousand noninterest-bearing note payable to a former Smart Shop shareholder. The note is due in its entirety on August 5, 2005. 5. INCOME TAXES The components of loss before income taxes including discontinued operations for the years ended December 31, 1999, 1998 and 1997 included the following:
(in thousands) 1999 1998 1997 ---------- ---------- ---------- United States $ (1,708) $ (3,888) $ (5,591) Foreign -- 8 1 ---------- ---------- ---------- $ (1,708) $ (3,880) $ (5,590) ========== ========== ==========
The components of income tax benefit (expense) for the years ended December 31, 1999, 1998 and 1997 are as follows:
(in thousands) 1999 1998 1997 ----------- ----------- ----------- Current: Federal $ -- $ 1,482 $ 801 State -- 174 -- Foreign (175) -- -- ----------- ----------- ----------- (175) 1,656 801 ----------- ----------- ----------- Deferred: Federal (484) (1,518) 1,099 State (49) (71) ----------- ----------- ----------- (533) (1,589) 1,099 ----------- ----------- ----------- Income tax (expense) benefit $ (708) $ 67 $ 1,900 =========== =========== ===========
F-11 29 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Benefit (provision) for income taxes differed from the amounts computed by applying the U.S. Federal statutory income tax rate of 34% to loss before taxes as a result of the following for the years ended December 31, 1999, 1998 and 1997:
(in thousands) 1999 1998 1997 ---------- ---------- ---------- Expected tax benefit $ 581 $ 1,316 $ 1,900 Research and development credit -- 201 -- State taxes, net of federal benefit -- 68 -- Change in valuation allowance (1,024) (1,521) -- Change in prior year estimate (175) -- -- Other (90) 3 -- ---------- ---------- ---------- Income tax (provision) benefit $ (708) $ 67 $ 1,900 ========== ========== ==========
The components of the net deferred tax asset at December 31, 1999 and 1998 were as follows:
(in thousands) 1999 1998 -------- -------- Deferred taxes from continuing operations: Deferred tax assets: Net operating loss $ 4,160 $ 2,698 Allowance for doubtful accounts 169 430 Accrued benefits 40 153 Credits 506 506 Intangible assets 321 Compensation 247 Other 137 65 Valuation allowance (2,545) (1,521) -------- -------- $ 3,035 $ 2,331 ======== ======== Deferred tax liabilities: Depreciation 308 253 Capitalized software 2,622 1,545 Other 105 -- -------- -------- $ 3,035 $ 1,798 ======== ========
At December 31, 1999, the Company had net operating loss carryforwards of approximately $11.1 million, which will expire beginning in 2018. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these considerations, the Company has fully reserved all deferred tax assets to the extent such assets exceed deferred tax liabilities. F-12 30 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. DISCONTINUED OPERATIONS Effective July 1, 1998, the Company sold its Auto ID hardware integration and servicing business ("Systems Operations"). In conjunction therewith, during the first quarter of 1998, the Company reported a loss of $1.25 million related to the disposal thereof and $469 thousand related to operations through the date of disposal. As a result of this action, the Company's revenues and operating expenses for the periods presented herein reflect only the Software Operations with the net results of the Systems Operations reported on its statements of operations under the caption "Discontinued Operations". Revenues related to the Systems Operations were $3.1 million and $12.9 million for the years ended December 31, 1998 and 1997, respectively. 7. STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK The board of directors is authorized, subject to certain limitations and without stockholder approval, to issue up to 2.2 million shares of preferred stock in one or more series and to fix the rights and preferences of each series. In 1999, the board of directors designated 100,000 shares of authorized but unissued preferred stock as Series A convertible preferred stock. REDEEMABLE CONVERTIBLE PREFERRED STOCK On August 6, 1999, the Company issued through a private placement 50,000 shares of the Company's Series A convertible Preferred Stock for $5.0 million to a wholly-owned subsidiary of Safeguard Scientifics, Inc. ("Safeguard"), the Company's primary shareholder. The Series A Preferred Stock has a par value of $.01 per share and a liquidation preference of $100 per share plus cumulative dividends and interest. The Company is obligated to redeem the shares at $100 per share plus accumulated dividends and interest at any time after December 31, 2002. Dividends on the Series A Preferred Stock are cumulative and payable at a rate of $8.00 per share per annum and in preference to any dividends on the Company's common stock. Cumulative dividends are interest bearing. The preferred stock is convertible at any time into shares of common stock of the Company or into shares of common stock of any majority owned subsidiary of the Company, at the election of the holder at a conversion rate of $4.65 per share of common stock. At December 31, 1999, the aggregate redemption value was $5,167 thousand based on cumulative dividends and interest of $167 thousand. WARRANTS TO PURCHASE COMMON STOCK In 1994, the Company issued warrants to Safeguard and a director of the Company to purchase common stock of the Company. The warrants entitled Safeguard and the director to purchase 698,238 and 77,582 shares, respectively, of common stock of the Company at an exercise price of $3.02 per share. These warrants expire in November 2001. In December 1999, the director exercised his warrant to purchase 77,582 shares of the Company's common stock. Warrants to purchase 698,238 shares of common stock are outstanding at December 31, 1999. 8. EQUITY COMPENSATION PLANS In 1994, the Company adopted the 1994 Equity Compensation Plan (the 1994 Plan), which provides for stock options to be granted to employees, independent contractors and directors. The 1994 Plan was amended in 1999 to provide for the issuance of up to 2,500,000 shares of common stock pursuant to the grant of incentive stock options (ISO), non-qualified stock options (NSO), stock appreciation rights (SARs) and restricted stock awards. Options issued under the 1994 Plan generally vest over a four-year period and are exercisable up to eight years from the date of grant at a price per share equal to the fair market value of the underlying stock on the date of grant. The 1994 Plan also authorizes an automatic grant of options to purchase 15,000 shares of common stock to certain eligible directors upon initial election to the board of directors and a further grant of options to purchase 3,000 shares of common stock following the completion of each two-year period of service. Options granted to directors have a eight-year term and vest over four years. At December 31, 1999, there were 253,000 shares available for future grant under the 1994 Plan. The Company applies APB Opinion No. 25 in accounting for its stock option grants under these plans, which are described above. Accordingly, no compensation cost has been recognized for its stock option plans. If F-13 31 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- compensation cost for the Company's stock option plans had been determined based on the fair market value of the options at the grant dates for awards under those plans consistent with the method provided by SFAS 123, the Company's net loss and related per share amounts would have been reflected by the following pro forma amounts for the years ended December 31, 1999, 1998 and 1997:
(in thousands) 1999 1998 1997 -------- -------- -------- Net loss applicable to common stockholders As reported $ (2,583) $ (3,813) $ (3,690) Pro forma (3,405) (4,536) (3,908) Basic and diluted net loss per share As reported (0.22) (0.34) (0.33) Pro forma (0.29) (0.40) (0.35) ======== ======== ========
The pro forma net loss reflects only options granted since January 1, 1995. Compensation cost is reflected over the options' vesting period. The grant date per share weighted average value of stock options granted by the Company during the years ended December 31, 1999, 1998 and 1997 was $4.02, $3.07 and $2.70, respectively. The following assumptions were used by the Company to determine the fair value of stock options granted using the Black Scholes option-pricing model:
1999 1998 1997 ----------- ----------- ---------- Dividend yield 0 0 0 Expected volatility 95% 75% 64% Risk-free rate of return 5.3% to 6.6% 4.4% to 5.8% 5.9% to 6.5% Expected option life 5 years 5 years 5 years =========== =========== ===========
Option activity under the Company's Plans is summarized as follows:
(in thousands, except share prices) 1999 1998 1997 -------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- ---------- -------- -------- -------- ---------- Outstanding at beginning of period 1,162 $ 4.23 1,233 $ 4.37 1,129 $ 4.82 Options granted 573 3.57 404 4.72 800 4.38 Options exercised, expired and canceled (83) 4.41 (475) 4.80 (696) 5.12 -------- ---------- -------- -------- -------- ---------- Outstanding at end of period 1,652 $ 4.02 1,162 $ 4.23 1,233 $ 4.37 -------- ---------- -------- -------- -------- ---------- Options exercisable at year-end 504 296 316 Shares available for future grant 253 295 440
F-14 32 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following summarizes information about the Company's stock options outstanding at December 31, 1999 (in thousands, except share prices):
Options Outstanding Options Exercisable ----------------------------------------------------- ---------------------------- Weighted Avg. Remaining Number Contractual Life Weighted Avg. Number Weighted Avg. Range of Exercise Outstanding (in years) Exercise Price Exercisable Exercise Price - ------------------- ----------- ---------------- -------------- ----------- -------------- $ 2.50 - $3.50 481 6.4 $ 3.10 100 $ 3.50 $ 3.63 - $3.94 478 6.0 3.87 196 3.85 $ 4.00 - $4.88 624 6.7 4.49 174 4.46 $ 5.00 - $8.88 67 5.4 6.34 34 5.99 $12.63 - $13.56 2 7.9 13.37 0 -- ----------- ----------- 1,652 6.3 4.02 504 4.14 =========== ===========
9. RETIREMENT PLAN The Company maintains a discretionary defined contribution plan covering substantially all employees. During the years ended December 31, 1999, 1998 and 1997, the Company made contributions of approximately $.1 million, $89 thousand and $.1 million, respectively, to this plan. 10. RELATED PARTY TRANSACTIONS Safeguard Scientifics, Inc. "Safeguard" owns approximately 40% of the Company's outstanding common stock, on a fully diluted basis. Effective January 1, 1995, the Company and Safeguard entered into an administrative service agreement whereby Safeguard provides the Company with business and organizational strategy, legal and investment management, and merchant and investment banking services. The agreement provides for the payment of an administrative service fee of $30 thousand per month. The initial agreement expired on December 31, 1995, and is renewed annually on a year to year basis. General and administrative expense on the consolidated statements of operations includes $.4 million of such administrative service fees for the years ended December 31, 1999, 1998 and 1997. Additionally, in 1999 the Company paid $48 thousand for legal fees and in 1998 the Company paid $75 thousand for consulting services to Safeguard, which were not covered by this agreement. The manager of the Company's European operations is also the managing director of the Company's largest distributor in the United Kingdom. Effective February 1996, the Company entered into a distribution agreement with this distributor to which, in general, the Company sells products at discounts from list price representative of discounts given to similar distributors. Consolidated revenues includes $1.3 million, $1.1 million and $.5 million of sales to this distributor for the years ended December 31, 1999, 1998 and 1997, respectively. Accounts receivable from this customer were $291 thousand and $372 thousand at December 31, 1999 and 1998, respectively. The Company has also entered into a shared facility arrangement, in which certain office space and equipment are shared between the distributor and the Company's European Headquarters. In August 1999, the Company issued through a private placement 1,204,819 shares of the Company's common stock for $5.0 million and 50,000 shares of the Company's Series A convertible preferred stock for $5.0 million to a wholly owned subsidiary of Safeguard. F-15 33 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 11. EXPORT REVENUES Included in the consolidated statements of operations are export revenues aggregating $15.1 million, $15.4 million and $9.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. These revenues were made primarily in Europe and, to a lesser extent, Canada, Latin America and Asia. 12. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office space, equipment and automobiles under non-cancelable capital and operating lease agreements which expire at various dates through the year 2010. Assets recorded under capital leases, primarily equipment, were $85 thousand and $185 thousand at December 31, 1999 and 1998, respectively and the related accumulated amortization was $56 thousand and $185 thousand at December 31, 1999 and 1998, respectively. Amortization of capital lease assets of $12 thousand, $8 thousand, and $59 thousand was included in depreciation expense for the years ended December 31, 1999, 1998 and 1997, respectively. Future minimum payments under capital lease obligations are not significant. Future minimum lease payments at December 31, 1999 under operating leases were as follows (in thousands): 2000 $ 1,393 2001 2,032 2002 1,917 2003 1,828 2004 1,719 Thereafter 9,481 -------- Total minimum lease commitments $ 18,370 ========
Total rent expense charged to earnings was approximately $1.2 million, $1.0 million and $1.3 million during the years ended December 31, 1999, 1998 and 1997, respectively. OTHER The Company has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of the Company. 13. SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK The Company defines its operations as operating segments based on two distinct product divisions - the USDATA product division, which includes its FactoryLink and Xfactory product lines, and the eMake product division, which develops and distributes internet applications that deliver integrated production solutions and real-time visibility across the supply chain and includes the Company's recently acquired Smart Shop unit. The Company uses revenues and income (loss) from continuing operations, which consists of revenues less operating expenses, to measure segment operations. F-16 34 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following summarizes information related to the Company's segments. All significant intersegment activity has been eliminated. Assets are the owned or allocated assets used by each operating segment.
Year Ended December 31, -------------------------------------- (in thousands) 1999 1998 1997 ---------- ---------- ---------- Revenues: USDATA Division $ 25,634 $ 22,861 $ 22,381 eMake Division 1,411 -- -- ---------- ---------- ---------- $ 27,045 $ 22,861 $ 22,381 ========== ========== ========== Income (loss) from operations: USDATA Division $ 3,361 $ (2,359) $ (6,229) eMake Division (5,183) -- -- ---------- ---------- ---------- (1,822) (2,359) (6,229) Other income, net 114 198 310 ---------- ---------- ---------- Loss from continuing operations before income taxes $ (1,708) $ (2,161) $ (5,919) ========== ========== ========== Depreciation and amortization: USDATA Division $ 1,045 $ 1,448 $ 2,633 eMake Division 642 -- -- ---------- ---------- ---------- $ 1,687 $ 1,448 $ 2,633 ========== ========== ========== Total assets: USDATA Division $ 19,323 $ 16,401 $ 19,254 eMake Division 7,544 -- -- ---------- ---------- ---------- $ 26,867 $ 16,401 $ 19,254 ========== ========== ==========
The pertinent data relating to foreign operations is as follows:
Year Ended December 31, ------------------------------------ (in thousands) 1999 1998 1997 ---------- ---------- ---------- Revenues to external customers: North America $ 13,335 $ 9,926 $ 12,750 Europe 12,193 11,550 8,356 Others 1,517 1,385 1,275 ---------- ---------- ---------- $ 27,045 $ 22,861 $ 22,381 ========== ========== ========== Total assets: North American $ 25,914 $ 15,660 $ 17,850 Europe 953 741 1,404 Others -- -- -- ---------- ---------- ---------- $ 26,867 $ 16,401 $ 19,254 ========== ========== ==========
F-17 35 USDATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 14. SUBSEQUENT EVENTS On February 8, 2000, the Company received $2.5 million in financing from a wholly owned subsidiary of Safeguard. The Company has not finalized the terms and provisions of this financing. 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands, except share data)
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Revenues $ 6,278 $ 6,494 $ 6,719 $ 7,554 ---------- ---------- ---------- ---------- Income (loss) from continuing operations 401 473 (854) (2,436) Dividends on preferred stock -- -- (63) (104) ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders $ 401 $ 473 $ (917) $ (2,540) ========== ========== ========== ========== Earnings (loss) per common share (Basic and Diluted) $ 0.04 $ 0.04 $ (0.08) $ (0.20) ========== ========== ========== ========== Weighted average shares outstanding: Basic 11,261 11,402 12,098 12,615 Diluted 11,327 11,511 12,098 12,615 ========== ========== ========== ==========
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Revenues $ 5,640 $ 5,806 $ 4,890 $ 6,525 ---------- ---------- ---------- ---------- Income (loss) from continuing operations (446) (353) (1,844) 549 Loss from discontinued operations (1,719) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (2,165) $ (353) $ (1,844) $ 549 ========== ========== ========== ========== Earnings (loss) per common share (Basic and Diluted): Income (loss) from continuing operations $ (0.04) $ (0.03) $ (0.16) $ 0.05 Loss from discontinued operations (0.16) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (0.20) $ (0.03) $ (0.16) $ 0.05 ========== ========== ========== ========== Weighted average shares outstanding (Basic and Diluted) 11,100 11,211 11,233 11,237 ========== ========== ========== ==========
The amounts presented in the 1999 third quarter have been restated from those amounts reported in the Company's 1999 Form 10-Q for the quarter ended September 30, 1999 to reflect the inclusion of the Smart Shop operations from the closing date of the acquisition, August 6, 1999. Amounts previously reported included the Smart Shop operations as of the effective date of the acquisition, July 1, 1999. The third quarter amounts have also been restated to give effect to the amortization of goodwill and other identifiable intangibles over a five-year useful life as opposed to the twenty-year amortization period initially used. Earnings per share calculations are based on the weighted average number of shares outstanding in each period; therefore, the sum of the earnings per share amounts for the quarters does not necessarily equal the year-to-date earnings per share. F-18 36 USDATA Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 1999, 1998 and 1997
Balance at beginning of Charged to Accounts Balance at end Description year expense Written Off of year - ----------- ------------ ---------- ----------- -------------- December 31, 1999 Allowance for doubtful accounts $ 1,150,000 $ 36,000 $ (733,000) $ 453,000 December 31, 1998 Allowance for doubtful accounts $ 1,158,000 $ 252,000 $ (260,000) $ 1,150,000 December 31, 1997 Allowance for doubtful accounts $ 424,000 $ 951,000 $ (217,000) $ 1,158,000
F-19 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Richardson, State of Texas, on the 29th day of March, 2000. USDATA Corporation By: /s/ ROBERT A. MERRY -------------------------- Robert A. Merry President, Chief Financial Officer and Director POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of USDATA Corporation, hereby severally constitute and appoint Robert A. Merry and Robert L. Drury, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable USDATA Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature /s/ ROBERT A. MERRY President, Chief Executive March 29, 2000 - ------------------------------- Officer (Principal Executive Officer) Robert A. Merry and Director /s/ ROBERT L. DRURY Vice President and Chief Financial March 29, 2000 - ------------------------------- Officer, Treasurer and Secretary Robert L. Drury (Principal Financial and Accounting Officer) /s/ MARK D. HOPPER Chairman of the Board March 29, 2000 - ------------------------------- Max D. Hopper /s/ STEPHEN J. ANDRIOLE, PH.D. Director March 29, 2000 - ------------------------------- Stephen J. Andriole, Ph.D. /s/ JAMES W. DIXON Director March 29, 2000 - ------------------------------- James W. Dixon /s/ JACK L. MESSMAN Director March 29, 2000 - ------------------------------- Jack L. Messman /s/ ARTHUR R. SPECTOR Director March 29, 2000 - ------------------------------- Arthur R. Spector
38 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation of the Company, as amended.# 3.2 By-laws of the Company.* 4.1 Specimen stock certificate representing the Common Stock.*** 4.2 Specimen stock certificate representing the Preferred Stock.# 10.1 1982 Incentive Stock Option Plan.* 10.2 1992 Incentive and Nonstatutory Option Plan.* 10.3 1994 Equity Compensation Plan, as amended.* 10.4 Office Lease Agreement dated as of June 1992, by and between Carter - Crowley Properties, Inc. and the Company.* 10.8 Administrative Services Agreement between Safeguard Scientifics, Inc. and the Company.*** 10.9 First Amendment to Office Lease Agreement, dated as of June 1992 by and between Carter-Crowley Properties, Inc. and the Company.**** 10.10 Stock Purchase Agreement, dated August 6, 1999, by and between the Company and Safeguard Delaware, Inc.# 10.11 Investors' Rights Agreement, dated August 6, 1999, by and among the Company, Safeguard Delaware, Inc. and Safeguard Scientifics, Inc.# 11.1 Statement regarding computation of earnings per share.# 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP.# 23.2 Consent of PricewaterhouseCoopers LLP.# 24.1 Power of Attorney (included on signature page). 27.1 Financial data schedule. (EDGAR version only).
- ------------ # Filed herewith * Filed on April 12, 1995 as an exhibit to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. ** Filed on June 1, 1995 as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. *** Filed on June 15, 1995 as an exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 33-91124) and incorporated by reference herein. **** Filed on March 31, 1998 as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. EX-3.1 2 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF DESIGNATION FOR SERIES A PREFERRED STOCK OF USDATA CORPORATION The undersigned, Robert L. Drury, the Chief Financial Officer of USDATA Corporation, does hereby certify that: (a) he is, and at all times mentioned herein was, the duly elected and acting Chief Financial Officer of USDATA Corporation, a Delaware corporation (the "Corporation"); and (b) pursuant to Section 151 of the Delaware General Corporation Law, the Board of Directors of the Corporation adopted the following preamble and resolution on August 4, 1999: WHEREAS, the Corporation's Certificate of Incorporation authorizes a class of stock designated Preferred Stock (the "Preferred Stock"), comprised of 2,200,000 shares, par value $0.01 per share, provides that such Preferred Stock may be issued from time to time in one or more series, and vests authority in the Board of Directors of the Corporation to fix or alter the rights, preferences, restrictions and other terms and conditions of any wholly unissued series of Preferred Stock; NOW, THEREFORE, BE IT: RESOLVED, that, the Board of Directors of the Corporation does hereby designate 100,000 shares of authorized but unissued Preferred Stock as "Series A Preferred Stock," and does hereby designate the voting powers, preferences and relative participation, optional or other special rights and qualifications, limitations or restrictions of the Series A Preferred Stock as follows: 1. Dividends. a. The holders of the Series A Preferred Stock shall be entitled to receive cumulative dividends at the rate of $8.00 per share per annum (as adjusted for any stock dividends, combinations, splits or similar events) whether or not earned or declared. Any accumulated dividends shall bear interest at the rate of 8.00% per annum compounded annually. Such dividends and interest thereon shall be payable, at the election of the Corporation, in additional shares of Series A Preferred Stock (valued at $100.00 per share, as adjusted for any stock dividends, combinations, splits or similar events) or in cash, (i) when, as and if declared by the Board of Directors of the Corporation or (ii) upon conversion of all of the Series A Preferred Stock to Common Stock pursuant to Section 5 below. 2 b. No dividends or distributions of any sort (other than a dividend payable solely in the Common Stock of the Corporation) shall be declared or paid by the Corporation on any Common Stock of the Corporation so long as any accrued dividends on the Series A Preferred Stock remain unpaid. c. In the event that the Corporation shall declare a dividend or distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, or options or rights to purchase any such securities or evidences of indebtedness or other assets (including cash), to the holders of Common Stock of the Corporation, then the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such dividend or distribution as though the holders of the Series A Preferred Stock were the holders of the number of shares of Common Stock of the Corporation into which their respective shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of the Common Stock of the Corporation entitled to receive such dividend or distribution. d. All numbers relating to calculation of cumulative dividends or the payment of dividends on the Series A Preferred Stock in kind shall be subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Series A Preferred Stock. 2. Liquidation Preference. a. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock or any other series of Preferred Stock by reason of their ownership thereof, an amount equal to $100.00 (as adjusted for any stock dividends, combinations, splits or similar events) plus all accrued but unpaid dividends and interest thereon (the "Liquidation Amount") for each share of Series A Preferred Stock then held by them. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full Liquidation Amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the aggregate Liquidation Amount each such holder is otherwise entitled to receive. The holders of Series A Preferred Stock shall have the right to convert such shares into Common Stock, in accordance with Section 5 hereof, at any time prior to or in connection with any liquidation, dissolution or winding up of the Corporation. b. After payment to the holders of the Series A Preferred Stock of the amounts set forth in Section 2.a. above, the entire remaining assets and funds of the Corporation legally available for distribution, if any, to the Corporation's stockholders shall be distributed among the holders of the Common Stock and the Series A Preferred Stock in proportion to the shares of Common Stock then held by them and the shares of Common Stock which they then have the right to acquire upon conversion of the shares of Series A Preferred Stock then held by them. 2 3 c. For purposes of this Section 2, at the written direction of holders of at least a majority of the shares of Series A Preferred Stock then outstanding, (i) any acquisition of the Corporation by means of merger or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for securities or other consideration issued or paid, or caused to be issued or paid, by the acquiring entity or its subsidiary (other than a mere reincorporation transaction) or (ii) a sale, lease or conveyance of all or substantially all of the assets of the Corporation (upon such written direction, each event described in (i) and (ii), a "Corporate Transaction"), shall be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the holders of Series A Preferred Stock to receive at the closing of such Corporate Transaction in cash, securities or other property (valued as provided in Section 2.d. below) the amounts specified in Section 2.a. above. The provisions of this Section 2 shall not apply to any reorganization, merger or consolidation involving (1) only a change in the state of incorporation of the Corporation, (2) a merger of the Corporation with or into a wholly-owned subsidiary of the Corporation that is incorporated in the United States of America, or (3) an acquisition by merger, reorganization or consolidation of another corporation (a) in which the Corporation is substantively the surviving corporation, the Corporation continues to operate thereafter as a going concern and the Corporation is not the target in such acquisition, and (b) that (i) is approved by the Board of Directors of the Corporation, (ii) does not result in the holders of the Corporation's Common Stock and Preferred Stock immediately prior thereto holding less than 50% of the outstanding voting securities of the surviving corporation immediately thereafter and (iii) does not involve a recapitalization of the Series A Preferred Stock. d. Whenever the distribution provided for in this Section 2 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the Board of Directors. The Liquidation Amount shall in all events be paid in cash; provided, however, that if the Liquidation Amount is otherwise payable in connection with a consolidation or merger of the Corporation, or sale of substantially all of the capital stock of the Corporation, then each holder of the Series A Preferred Stock shall receive payments with respect to the Series A Preferred Stock in the same form of consideration as is payable with respect to the Common Stock. In the event of any business combination or acquisition involving the Corporation which is intended to be treated as a "pooling of interests" for accounting purposes under Accounting Principles Board Opinion No. 16, the acquisition consideration (including any shares of capital stock or other securities to be delivered or exchanged by the acquiring corporation) shall be reallocated among the holders of Series A Preferred Stock in an appropriate manner to give economic effect to the essential intent and purposes of Sections 2.a and 2.c. 3. Redemption. a. At any time after December 31, 2002, the holders of a majority of the outstanding shares of Series A Preferred Stock shall have the option to require the Corporation to redeem (a "Mandatory Redemption") all, but not less than all, of the Series A Preferred Stock then outstanding at a price per share of Series A Preferred Stock equal to the Liquidation Amount. The holders of shares of Series A Preferred Stock may exercise such option by giving written notice (the "Redemption Notice") to the Corporation of such election. Such Mandatory Redemption shall be effected, and the Corporation shall be obligated to redeem 3 4 all outstanding shares of Series A Preferred Stock, to the extent that it may lawfully do so, in three equal annual installments each equal to one-third of the number of shares of Series A Preferred Stock outstanding at the time such option is exercised. The redemption dates for any such Mandatory Redemption shall be the 45th day after receipt by the Corporation of such Redemption Notice and the first and second anniversaries of such 45th day (each, a "Mandatory Redemption Date"). b. If the funds of the Corporation legally available for redemption of Series A Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock to be redeemed on such Mandatory Redemption Date, those funds that are legally available shall be used to redeem the maximum possible number of shares of Series A Preferred Stock ratably among the holders of such shares to be redeemed on the basis of the redemption amounts due with respect to the shares held by each such holder. At any time and from time to time thereafter when additional funds of the Corporation are legally available for redemption of shares of Series A Preferred Stock, such funds shall be used to immediately redeem the balance of the shares which the Corporation has become obligated to redeem on any Mandatory Redemption Date but which it has not redeemed. Such shares shall be redeemed ratably among the holders of such shares to be redeemed on the basis of the redemption amounts due with respect to the balance of the shares held by each such holder which the Corporation became obligated to redeem on such Mandatory Redemption Date but which have not been redeemed. Such funds shall not be used for any other purpose, including the redemption of any shares of Series A Preferred Stock which the Corporation is obligated to redeem on any subsequent date. 4. Voting Rights. Each holder of shares of Series A Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which such shares of Series A Preferred Stock could be converted and shall have voting rights and powers equal to the voting rights and powers of such Common Stock (except as otherwise expressly provided herein or as required by law, voting together with the Common Stock as a single class) and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation and the Delaware General Corporation Law. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). Such determination of "whole shares" shall be based upon the aggregate number of shares of Series A Preferred Stock held by each holder, and not upon each share of Series A Preferred Stock so held by the holder. Each holder of Common Stock shall be entitled to one vote for each share of Common Stock held. Except as otherwise expressly provided in the Certificate of Incorporation, the holders of shares of Series A Preferred Stock and Common Stock shall vote together (or render written consents in lieu of a vote) as a single class on all matters submitted to the stockholders of the Corporation. 5. Conversion. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): a. Right to Convert. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time at the office of the Corporation or any 4 5 transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $100.00 plus all accrued but unpaid dividends and interest thereon by the conversion price applicable to such share (the "Conversion Price"), determined as hereinafter provided, in effect on the date the certificate is surrendered for conversion. The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of shares of the Series A Preferred Stock initially shall be $4.65 per share of Common Stock. Such initial Conversion Price shall be adjusted as hereinafter provided. b. Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same and shall state therein the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. c. Adjustments to Conversion Price for Certain Diluting Issues. (i) Special Definitions. For purposes of this Section 5.c., the following definitions apply: (1) "Options" shall mean rights, options, or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (defined below) other than any such right, option, or warrants covered by Section 5.c.4(B) below. (2) "Original Issue Date" shall mean the date on which a share of Series A Preferred Stock was first issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock and Series A Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5.c.(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued (or deemed issued): (A) upon conversion of shares of Series A Preferred Stock; 5 6 (B) to outside directors, officers, employees and consultants pursuant to the Corporation's 1994 Equity Compensation Plan or Employee Stock Purchase Plan or other employee stock plan (the "Employee Stock"), provided that (i) the issuance of such shares is or has been approved by a majority of the members of the Board of Directors or any duly constituted committee thereof and (ii) the number of shares of Employee Stock does not exceed an aggregate of 2,700,000 shares (as adjusted for any stock dividends, combinations, splits or similar events) regardless of whether issued by the Corporation prior to the date hereof; (C) as a dividend or distribution on Series A Preferred Stock; or (D) for which adjustment of the Conversion Price is made pursuant to Section 5.d. (ii) No Adjustment of Conversion Price. Any provision herein to the contrary notwithstanding, no adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to Section 5.c.(v) hereof) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue. In computing each adjusted Conversion Price, the result shall be rounded to five decimal places, and such adjustment shall be made separately in each instance, and in the event the adjustment therefrom results in a change of the Conversion Price of less than $0.01, no adjustment to the then Conversion Price shall be made, but the amount of said adjustment calculated thereby shall be carried forward to successive occasions until such adjustments in the aggregate equal or exceed $0.01. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) no further adjustments in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon 6 7 the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Conversion Price shall affect Common Stock previously issued upon conversion of the Series A Preferred Stock); (3) no readjustment pursuant to clause (1) or (2) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (a) the Conversion Price on the original adjustment date, or (b) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation, at any time after the Original Issue Date, shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5.c.(iii)) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all shares of Series A Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock and any outstanding Options or other Convertible Securities had been fully exercised (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date. The provisions of this Section 5.c may be waived in any instance (without the necessity of convening any meeting of stockholders of the Corporation) upon the written approval of the holders of a majority of the outstanding shares of Series A Preferred Stock. (v) Determination of Consideration. For purposes of this Section 5.c., the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) Cash and Property: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation; 7 8 (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received in exchange for the Additional Shares of Common Stock, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5.c.(iii), relating to Options and Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. d. Adjustments to Conversion Price for Stock Dividends and for Combinations or Subdivisions of Common Stock. In the event that the Corporation at any time or from time to time after the Original Issue Date shall effect a (i) subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock dividend, stock split, reclassification or otherwise), or (ii) combination or consolidation of the outstanding shares of Common Stock into a lesser number of shares of Common Stock (by reclassification or otherwise), then the Conversion Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that the Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have subdivided the outstanding shares of Common Stock by an amount of shares equal to the maximum number of shares issuable through such dividend and/or upon exercise of such rights to acquire Common Stock. e. Adjustments to Conversion Price for Reclassification and Reorganization. If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of 8 9 stock, whether by capital reorganization, reclassification or otherwise (other than as provided for in Section 5.d. above or in connection with a Corporate Transaction), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before that change. f. No Impairment. The Corporation shall not, by amendment of its Certificate of Incorporation or the Certificate of Incorporation of any Subsidiary (as hereinafter defined) through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation or any Subsidiary, but shall at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. g. Certificates as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred Stock. h. Notices of Record Date. In the event that the Corporation shall propose at any time to effect any reclassification or recapitalization, to merge or consolidate with or into any other entity, or sell, lease or convey all or substantially all of its assets, or to liquidate, dissolve or wind up, then, in connection with each such event, the Corporation shall send to the holders of Series A Preferred Stock: (1) at least 20 days prior written notice of the date on which a record shall be taken for such event and specifying the date on which such event shall occur; and (2) at least 20 days prior written notice of the record date for determining rights to vote, if any, in respect of such event. i. Issue Taxes. The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. 9 10 j. Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. k. Fractional Shares. No fractional share shall be issued upon the conversion of any share or shares of Series A Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). l. Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. m. Option to Convert to Securities of Subsidiary. At the option of any holder of Series A Preferred Stock, such holder shall have the right (but not the obligation) to convert in the manner provided in this Section 5.m any share of Series A Preferred Stock then held by it into fully paid and nonassessable shares of the common stock ("Subsidiary Common Stock") of any direct or indirect subsidiary of the Corporation more than 50% of the outstanding voting securities of which are owned directly or indirectly by the Corporation (each, a "Subsidiary"). Such right may be exercised by delivery to the Corporation of the certificates representing the shares of Series A Preferred Stock to be converted together with written notice of such exercise specifying the applicable Subsidiary. The number of shares of Subsidiary Common Stock into which any share of Series A Preferred Stock is convertible under Section 5.m shall be equal to the quotient obtained by dividing the aggregate Fair Market Value (and hereinafter defined) of the number of shares of Common Stock into which a share of Series A Preferred Stock is then convertible under Section 5.a above by the Fair Market Value of a share of Subsidiary Common Stock. As used herein, the term "Fair Market Value" shall mean (a) as of any date and with respect to a share of the Corporation's Common Stock, the average of the closing prices of the Corporation's Common Stock on the NASDAQ National Market (or such other quotation system or securities exchange upon which the Corporation's Common Stock is then traded) as reported by the NASDAQ National Market or such exchange or other quotation system for the consecutive 30-day trading period immediately preceding such date, and (b) as of any date and with respect to a share of Subsidiary Common Stock, the most recent price per 10 11 share at which shares of such Subsidiary Common Stock were issued and sold by such Subsidiary in an arm's length transaction with an unaffiliated third party (or if lower, the price per share in a transaction with an affiliate), including, if applicable, the exercise price per share in any options, rights or warrants to subscribe for or otherwise acquire Subsidiary Common Stock ("Subsidiary Options") or Subsidiary Convertible Securities (as hereinafter defined) or the conversion price per share in any securities convertible into or exchangeable for Subsidiary Common Stock ("Subsidiary Convertible Securities"). The Corporation shall take, and shall cause the related Subsidiary to take, all actions necessary to issue any shares of Subsidiary Common Stock issuable under this Section 5.m and to cause such shares to be duly authorized, validly issued, fully paid and nonassessable, including, without limitation, amending such Subsidiary's Certificate of Incorporation to increase the number of shares of Subsidiary Common Stock issuable thereunder, if necessary, and pay, on the holders behalf, any consideration required to accomplish the foregoing. The Corporation shall notify each holder of shares of Series A Preferred Stock of any sale of Subsidiary Common Stock, Subsidiary Options or Subsidiary Convertible Securities by a Subsidiary at least fifteen business days before such sale is consummated. Any such notice shall be in writing and shall describe the securities to be issued and sold by such Subsidiary and the consideration to be received by it in connection therewith. 6. Restrictions and Limitations. So long as any shares of Series A Preferred Stock remain outstanding, in addition to any other vote required by the Delaware General Corporation Law, the vote or written consent or written agreement of the holders of at least a majority of the then outstanding shares of the Series A Preferred Stock, voting as a separate class, shall be required in order to: (i) alter, amend or modify the rights, preferences or privileges of the Series A Preferred Stock; (ii) increase the authorized number of shares of the Series A Preferred Stock or issue any additional shares of Series A Preferred Stock other than shares issued in payment of dividends on the outstanding share of Series A Preferred Stock pursuant to Section 1.a above; (iii) authorize or issue, or obligate itself to issue, any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Series A Preferred Stock as to dividend rights, liquidation preferences or redemption rights; (iv) redeem, purchase or otherwise acquire any shares of Common Stock or Preferred Stock (or pay into a sinking fund for such purpose); provided, however, that this restriction shall not apply to any redemption pursuant to Section 3 or to the repurchase of shares of Common Stock at the original purchase price from employees, officers, directors or other persons performing services for this Corporation; (v) merge or consolidate with or into any other entity or sell, lease or convey any substantial portion of the Corporation's assets, provided, however, that the provisions of this clause (v) shall not apply to any reorganization, merger or consolidation 11 12 involving (1) only a change in the state of incorporation of the Corporation, (2) a merger of the Corporation with or into a wholly-owned subsidiary of the Corporation that is incorporated in the United States of America, or (3) an acquisition by merger, reorganization or consolidation of another corporation (a) in which the Corporation is substantively the surviving corporation, the Corporation continues to operate thereafter as a going concern and the Corporation is not the target in such acquisition, and (b) that (i) is approved by the Board of Directors of the Corporation, (ii) does not result in the holders of the Corporation's Common Stock and Preferred Stock immediately prior thereto holding less than 50% of the outstanding voting securities of the surviving corporation immediately thereafter and (iii) does not involve a recapitalization of the Series A Preferred Stock.; (vi) alter, amend or modify the Corporation's Certificate of Incorporation or Bylaws; or (vii) amend or modify any existing employee incentive stock plan of the Corporation to increase the number of shares of Common Stock issuable thereunder, or create any new employee incentive stock plan for employees, officers, directors or consultants of the Corporation. 7. No Reissuance of Series A Preferred Stock. No share or shares of Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and restored to the status of undesignated Preferred Stock. IN WITNESS WHEREOF, this Certificate of Designation has been signed by the Chief Financial Officer of the Corporation this 6th day of August, 1999. ---------------------------------------- Robert L. Drury, Chief Financial Officer 12 EX-4.2 3 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.2 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS. SEE REVERSE SIDE. INCORPORATED UNDER THE LAWS OF DELAWARE Certificate Number Shares - 0 - - 0 - USDATA CORPORATION Authorized 100,000 Shares of Series A Preferred Stock Par Value $0.01 per Share THIS CERTIFIES THAT ------------ S P E C I M E N-------------- IS THE OWNER OF - -------------------- 0 -------------------------- SHARES OF THE CAPITAL STOCK OF USDATA CORPORATION TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED THIS _____ DAY OF __________, A.D., _____. - ----------------------------- ------------------------------ President Secretary 2 THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 'ACT'), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, AND THE HOLDER HEREOF CANNOT MAKE ANY SALE, ASSIGNMENT OR OTHER TRANSFER OF ANY SHARES OF SUCH STOCK EXCEPT PURSUANT TO AN OFFERING OF SUCH SHARES DULY REGISTERED UNDER THE ACT AND REGISTERED OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UNDER SUCH OTHER CIRCUMSTANCES AS IN THE OPINION OF COUNSEL FOR OR SATISFACTORY TO THE ISSUER SHALL NOT, AT THE TIME, REQUIRE REGISTRATION UNDER THE ACT AND/OR REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAW. ALSO SAID SHARES ARE 'RESTRICTED SECURITIES' WITHIN THE MEANING OF RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND MAY BE SUBJECT TO THE LIMITATIONS AND REPORTING REQUIREMENTS OF SAID RULE UPON RESALE OR OTHER DISPOSITION THEREOF. THIS CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS OF STOCK. A FULL STATEMENT OF ALL DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, INCLUDING LIMITATIONS OF PREEMPTIVE RIGHTS, IS SET FORTH IN THE CERTIFICATE OF INCORPORATION ON FILE WITH THE OFFICE OF THE SECRETARY OF STATE OF THE STATE O F DELAWARE. A COPY OF THIS STATEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE, WITHOUT CHARGE, UPON WRITTEN REQUEST BEING MADE TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. EX-10.10 4 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.10 USDATA CORPORATION STOCK PURCHASE AGREEMENT August 6, 1999 2 TABLE OF CONTENTS
Page 1. Purchase and Sale of Stock...............................................................................1 1.1 Sale and Issuance of Stock......................................................................1 1.2 Closing.........................................................................................1 1.3 Consideration...................................................................................1 2. Representations and Warranties of the Company............................................................1 2.1 Organization, Good Standing and Qualification...................................................1 2.2 SEC Reports; Financial Statements...............................................................2 2.3 Capitalization and Voting Rights................................................................2 2.4 Authorization...................................................................................3 2.5 Valid Issuance of Preferred and Common Stock....................................................3 2.6 Governmental Consents...........................................................................3 2.7 Offering........................................................................................4 2.8 Compliance with Certain Matters.................................................................4 3. Representations and Warranties of the Investor...........................................................4 3.1 Authorization...................................................................................4 3.2 Purchase Entirely for Own Account...............................................................4 3.3 Disclosure of Information.......................................................................4 3.4 Investment Experience...........................................................................5 3.5 Accredited Investor.............................................................................5 3.6 Restricted Securities...........................................................................5 3.7 Further Limitations on Disposition..............................................................5 3.8 Legends.........................................................................................5 4. Conditions of Investor's Obligations at Closing..........................................................6 5. Conditions of the Company's Obligations at Closings......................................................6 5.1 Representations and Warranties..................................................................6 5.2 Performance.....................................................................................6 5.3 Proceedings and Documents.......................................................................6 5.4 Payment of Purchase Price.......................................................................7 5.5 Qualifications..................................................................................7 6. Miscellaneous............................................................................................7 6.1 Survival of Warranties..........................................................................7 6.2 Use of Proceeds.................................................................................7
i 3 6.3 Successors and Assigns..........................................................................7 6.4 Governing Law...................................................................................7 6.5 Counterparts....................................................................................7 6.6 Titles and Subtitles............................................................................7 6.7 Notices.........................................................................................7 6.8 Finder's Fee....................................................................................8 6.9 Expenses........................................................................................8 6.10 Dispute Resolution..............................................................................8 6.11 Amendments and Waivers.........................................................................10 6.12 Severability...................................................................................10 6.13 Aggregation of Stock...........................................................................10 6.14 Publicity......................................................................................10 6.15 Entire Agreement...............................................................................10
SCHEDULE A - Closing SCHEDULE B - Disclosure Schedule EXHIBIT A - Certificate of Designation EXHIBIT B - Investors' Rights Agreement
ii 4 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 6th day of August, 1999, by and among USDATA Corporation, a Delaware corporation (the "Company"), and Safeguard Delaware, Inc. (the "Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1 Sale and Issuance of Stock. (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) a Certificate of Designation for Series A Preferred Stock in the form attached hereto as Exhibit A (the "Certificate"). (b) Subject to the terms and conditions of this Agreement, the Investor agrees to purchase at the Closing, and the Company agrees to sell and issue to the Investor at the Closing, that number of shares of the Company's Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), set forth opposite the Investor's name on Schedule A hereto at an aggregate purchase price of $5,000,000. The rights, privileges and preferences of the Series A Preferred Stock shall be as stated in the Certificate. (c) Subject to the terms and conditions of this Agreement, the Investor agrees to purchase at the Closing, and the Company agrees to sell and issue to the Investor at the Closing, that number of shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock"), set forth opposite the Investor's name on Schedule A hereto at an aggregate purchase price of $5,000,000. 1.2 Closing. The purchase and sale of the Series A Preferred Stock and the Common Stock to be issued and sold hereunder (collectively, the "Stock") shall take place at 10:00 a.m., central time, on August 6, 1999, or at such other time as the Company and the Investor mutually agree upon (which time is designated as the "Closing"). 1.3 Consideration. At the Closing, the Company shall deliver to the Investor certificates representing the Stock being sold hereunder against payment of the purchase price therefor by wire transfer. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Investor that, except as set forth on the Disclosure Schedule attached hereto as Schedule B (the "Disclosure Schedule") furnished to the Investor and its special counsel, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 Organization, Good Standing and Qualification. Each of the Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its formation and has all requisite corporate power and authority to 5 carry on its business as now conducted and as proposed to be conducted. Each of the Company and each of its subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business, properties, results of operation or financial condition. 2.2 SEC Reports; Financial Statements. The Common Stock, par value $0.01 per share, of the Company is registered under Section 12(b) or (g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Company is in full compliance with its reporting and filing obligations under the Exchange Act. The Company has delivered to the Investor (a) its annual reports to stockholders and its Annual Reports on Form 10-K for its last two fiscal years and (b) all of its Quarterly Reports on Form 10-Q and each other report, registration statement or definitive proxy statement filed with the Securities and Exchange Commission (the "SEC") since the beginning of such two fiscal years (collectively, the "SEC Reports"). The SEC Reports (other than Quarterly Reports on Form 10-Q filed prior to the latest Annual Report on Form 10-K filed by the Company) do not (as of their respective dates) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The audited and unaudited financial statements of the Company included in the SEC Reports (the "Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as stated in such Financial Statements or the notes thereto) and fairly present the financial position of the Company and its consolidated subsidiaries as of the dates thereof and the results of their operations and changes in financial position for the periods then ended. Except as disclosed by the Company in the SEC Reports, since the end of the most recent of such fiscal years, there has been no material adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries taken together, and there is no existing condition, event or series of events which reasonably would be expected to have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken together, or the ability of the Company to perform its obligations under this Agreement or the Investors' Rights Agreement (as defined below). 2.3 Capitalization and Voting Rights (a) The authorized capital of the Company consists of: (i) 2,200,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of which 100,000 shares have been designated "Series A Preferred Stock" (the "Series A Preferred Stock") and none of which currently are issued or outstanding. (ii) 22,000,000 shares of Common Stock, par value $0.01 per share (the "Common Stock"), of which, as of the date of the last Quarterly Report on 10-Q filed by the Company, 11,402,366 shares are issued and outstanding. (b) All outstanding shares of capital stock of the Company's subsidiaries are owned beneficially and of record by the Company, free and clear of any liens, security interests, encumbrances or other adverse claims. 2 6 (c) All outstanding shares of capital stock of the Company and its subsidiaries have been duly and validly authorized and issued, are fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Securities Act"), and any relevant state securities laws or pursuant to valid exemptions therefrom. (d) Except as disclosed in the SEC Reports and except for the rights provided for in the Investors' Rights Agreement to be entered into in connection herewith and attached hereto as Exhibit B (the "Investors' Rights Agreement"), there are not any outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company or any of its subsidiaries of any shares of their capital stock. 2.4 Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the Investors' Rights Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Stock being sold hereunder and the Common Stock issuable upon conversion of the Series A Preferred Stock being has been taken, and this Agreement and the Investors' Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (c) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 Valid Issuance of Preferred and Common Stock. The Stock that is being purchased by the Investor hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Certificate, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. 2.6 Governmental Consents. Other than filings which are required or permitted to be made pursuant to applicable securities laws, which filings, if any, will be made within the applicable periods required by such laws, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement and the Investors' Rights Agreement. 3 7 2.7 Offering. Subject in part to the truth and accuracy of the Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Stock as contemplated by this Agreement are exempt from the registration requirements of the Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 Compliance with Certain Matters. Neither the Company nor any of its subsidiaries is in violation or default under or in breach of any provision of its Certificate of Incorporation or Bylaws, any agreement, instrument, contract, document, judgment, order, writ or decree to which it is a party or by which it is bound or any federal or state statute, rule or regulation applicable to it. The execution, delivery and performance of this Agreement and the Investors' Rights Agreement and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, agreement, instrument, contract, document, judgment, order, writ, decree, statute, rule or regulation or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or any of its subsidiaries or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company or any of its subsidiaries, their business or operations or any of their assets or properties. 3. Representations and Warranties of the Investor. The Investor hereby represents and warrants that: 3.1 Authorization. The Investor has full power and authority to enter into this Agreement and the Investors' Rights Agreement, and each such Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms. 3.2 Purchase Entirely for Own Account. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Stock to be received by the Investor and the Common Stock issuable upon conversion of the Series A Preferred Stock will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Stock or Common Stock issuable upon conversion of the Series A Preferred Stock. 3.3 Disclosure of Information. The Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Stock. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investor to rely thereon. 4 8 3.4 Investment Experience. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Stock. The Investor also represents it has not been organized for the purpose of acquiring the Stock. 3.5 Accredited Investor. The Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. 3.6 Restricted Securities. The Investor understands that the shares of Stock it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act, only in certain limited circumstances. In this connection, the Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Stock or Common Stock issuable upon conversion of the Series A Preferred Stock unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement, and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) If reasonably requested by the Company, the Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. 3.8 Legends. It is understood that the certificates evidencing the Stock or Common Stock issuable upon conversion of the Series A Preferred Stock may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (h) Any legend required by the securities laws of any applicable jurisdictions. (c) Any legend required by the Investors' Rights Agreement or other applicable agreement. 5 9 4. Conditions of Investor's Obligations at Closing. The obligations of the Investor under subsections 1.1(b) and 1.1(c) and Section 1.2 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: (a) Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. (c) Compliance Certificate. The Chief Financial Officer of the Company shall deliver to the Investor at the Closing a certificate on behalf of the Company stating that the conditions specified in Subsections 4(a) and 4(b) have been fulfilled and stating that there has been no material adverse change in the business, affairs, operations, properties, assets or condition of the Company or its subsidiaries since the date of the Financial Statements. (d) Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be duly obtained and effective as of such Closing. (e) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at such Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investor and its special counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. (f) Investors' Rights Agreement. The Company and the Investor shall have entered into the Investors' Rights Agreement. 5. Conditions of the Company's Obligations at Closings. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before each Closing of each of the following conditions by the Investor: 5.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 3 shall be true on and as of such Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 Performance. The Investor shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before such Closing. 5.3 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Company's counsel, and they shall 6 10 have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 5.4 Payment of Purchase Price. The Investor shall have delivered the purchase price specified in subsections 1.1(b) and 1.1(c). 5.5 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be duly obtained and effective as of such Closing. 6. Miscellaneous. 6.1 Survival of Warranties. The warranties, representations and covenants of the Company and the Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing, and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 6.2 Use of Proceeds. The Company shall use the proceeds from the sale of the Stock to the Investor hereunder to fund and develop the Company's eMake business and for other general corporate purposes. 6.3 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Stock or Common Stock issuable upon conversion of the Series A Preferred Stock). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.4 Governing Law. The construction, validity and interpretation of this Agreement will be governed by the internal laws of the State of Delaware without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. 6.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.7 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial overnight courier (with confirmation of receipt) or sent via facsimile (with confirmation of receipt) to the Company at 2345 North Central Expressway, Richardson, Texas 75080 (Fax: (972) 669-9557), 7 11 Attention: Robert L. Drury, or, in the case of the Investor, beneath the Investor's name on Schedule A hereto (or at such other address for a party as shall be specified by like notice) Notice given by facsimile shall be confirmed by appropriate answer back and shall be effective upon actual receipt if received during the recipient's normal business hours, or at the beginning of the recipient's next business day after receipt if not received during the recipient's normal business hours. All notices by facsimile shall be confirmed promptly after transmission in writing by certified mail or personal delivery. Any party may change any address to which notice is to be given to it by giving notice as provided above of such change of address. 6.8 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees, consultants or representatives is responsible. 6.9 Expenses. Irrespective of whether any Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement and any schedules or exhibits hereto. The Company shall, at the Closing, reimburse the reasonable fees and expenses of the Investor and its special counsel. The Investor shall use its best efforts to cause such fees and expenses not to exceed $20,000 in the aggregate. 6.10 Dispute Resolution. (a) If any dispute arising out of or relating to this Agreement or the Investors' Rights Agreement, or any other agreement executed in connection herewith or the breach, termination or validity thereof (a "Dispute") is not settled promptly in the ordinary course of business, the parties shall seek to resolve any such Dispute between them, first, by negotiating promptly with each other in good faith in face-to-face negotiations. These face-to-face negotiations shall be conducted by the respective designated senior management representative of each party. If the parties are unable to resolve the Dispute between them through these face-to-face negotiations, within 20 business days (or such period as the parties shall otherwise agree) following the date of notification (the "Notice Date") by one party to the other(s) of the existence of such Dispute, then any such Dispute shall be resolved in the following manner. (b) The parties shall endeavor to resolve any such Dispute by mediation under the CPR Mediation Procedures for Business Disputes. Unless otherwise agreed, the parties will select a mediator from the CPR Panels of Neutrals and shall notify CPR to initiate the selection process. 8 12 (c) Any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, exceeds $100,000 ("Summary Proceeding"), arising out of or relating to a Dispute which has not been resolved by mediation as provided herein within 90 days of the Notice Date, shall be litigated exclusively in the Superior Court of the State of Delaware (the "Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules (the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably and unconditionally (A) submits to the jurisdiction of the Delaware Superior Court for any Summary Proceeding, (B) agrees not to commence any Summary Proceeding except in the Delaware Superior Court, (C) waives, and agrees not to plead or to make, any objection to the venue of any Summary Proceeding in the Delaware Superior Court, (D) waives, and agrees not to plead or to make any claim that any Summary Proceeding brought in the Delaware Superior Court has been brought in an improper or otherwise inconvenient forum, (E) waives, and agrees not to plead or to make, any claim that the Delaware Superior Court lacks personal jurisdiction over it, (F) waives its right to remove any Summary Proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute, and (G) understands and agrees that it shall not seek a jury trial or punitive damages in any Summary Proceeding based upon or arising out of a Dispute, and waives any and all rights to any such jury trial or to seek punitive damages. (d) In the event any action, suit or proceeding where the amount in controversy as to at least one party, exclusive of interest and costs, does not exceed $100,000 (a "Proceeding"), arising out of or relating to a Dispute is brought, the parties to such Proceeding agree to make application to the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until such time as such application is rejected, such Proceeding shall be treated as a Summary Proceeding and all of the foregoing provisions of Section 6.10(c) relating to Summary Proceedings shall apply to such Proceeding. (e) If a Summary Proceeding is not available to resolve any Dispute hereunder, the controversy or claim shall be settled by arbitration conducted on a confidential basis, under the U.S. Arbitration Act, if applicable, and the then current Commercial Arbitration Rules of the American Arbitration Association (the "Association") strictly in accordance with the terms of this Agreement and the substantive law of the State of Delaware including law in respect of any statute of limitations. The arbitration shall be conducted at the Association's regional office located in Philadelphia, Pennsylvania by three arbitrators, at least one of whom shall be knowledgeable in telecommunications, one of whom shall be an attorney and one of whom shall be a member of a "Big Five" accounting firm familiar with telecommunications. Absent mutual agreement of the parties, the arbitrators specified in the preceding sentence shall be appointed pursuant to the Commercial Arbitration Rules of the Association. The arbitrators are not empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any right to recover damages in excess of compensatory damages with respect to any such Dispute. Judgment upon the arbitrators' award may be entered and enforced in any court of competent jurisdiction. (f) Neither party shall be precluded hereby from securing equitable remedies in courts of any jurisdiction, including, but not limited to, temporary restraining orders and preliminary injunctions to protect its rights and interests but shall not be sought as a means to avoid or stay arbitration or Summary Proceeding. 9 13 (g) Each party is required to continue to perform its obligations under this contract pending final resolution of any Dispute, unless to do so would be impossible or impracticable under the circumstances. 6.11 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company, the holders of a majority of the Common Stock issued or issuable upon conversion of the Series A Preferred Stock issued hereunder and the holders of a majority of the Common Stock issued hereunder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 6.12 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6.13 Aggregation of Stock. All shares of the Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 6.14 Publicity. Neither the Company nor the Investor shall take any action, or permit any of its employees, consultants, officers, directors or stockholders to take any action, which may result in the public disclosure of the transactions effected hereby or the identity of the Investor, unless required by law. If the Company determines that it is required by law to disclose these transactions or the identity of the Investor, it shall, at a reasonable time before making any such disclosure, consult with each Investor regarding such disclosure and seek confidential treatment of this Agreement and all schedules and exhibits hereto. 6.15 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. [Signature page to the Stock Purchase Agreement follows.] 10 14 IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement as of the date first above written. COMPANY: USDATA CORPORATION By: ------------------------------------- Name: ------------------------------------- Title: ------------------------------------- INVESTOR: SAFEGUARD DELAWARE, INC. By: ------------------------------------- Name: ------------------------------------- Title: -------------------------------------
15 SCHEDULE A CLOSING SERIES A PREFERRED STOCK
NAME NUMBER OF SHARES PURCHASE PRICE Safeguard Delaware, Inc. 50,000 $5,000,000 c/o Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Fax: (610) 293-0601
COMMON STOCK
NAME NUMBER OF SHARES PURCHASE PRICE Safeguard Delaware, Inc. 1,204,819 $5,000,000 c/o Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Fax: (610) 293-0601
16 SCHEDULE B DISCLOSURE SCHEDULE NONE 17 EXHIBIT A CERTIFICATE OF DESIGNATION EX-10.11 5 INVESTORS' RIGHTS AGREEMENT 1 EXHIBIT 10.11 USDATA CORPORATION INVESTORS' RIGHTS AGREEMENT August 6, 1999 2 TABLE OF CONTENTS
Page 1. Registration Rights...................................................................................... 1 1.1 Definitions..................................................................................... 1 1.2 Shelf Registration.............................................................................. 2 1.3 Company Registration............................................................................ 3 1.4 Obligations of the Company...................................................................... 3 1.5 Furnish Information............................................................................. 5 1.6 Expenses of Shelf Registration.................................................................. 5 1.7 Expenses of Company Registration................................................................ 5 1.8 Underwriting Requirements....................................................................... 5 1.9 Delay of Registration........................................................................... 6 1.10 Indemnification................................................................................. 6 1.11 Reports Under Securities Exchange Act of 1934................................................... 8 1.12 Assignment of Registration Rights............................................................... 8 1.13 Limitations on Subsequent Registration Rights................................................... 8 1.14 Request for Registration........................................................................ 8 2. Rights Offering.......................................................................................... 9 2.1 Rights.......................................................................................... 9 2.2 Split........................................................................................... 11 2.3 Registration Statement.......................................................................... 11 2.4 Registration Process............................................................................ 11 2.5 Use of Proceeds................................................................................. 12 2.6 Registration Services........................................................................... 12 2.7 Indemnification................................................................................. 13 3. Directed Shares Offering................................................................................. 15 3.1 Directed Shares Registration.................................................................... 15 3.2 Directed Shares Subscription Program............................................................ 16 4. Miscellaneous............................................................................................ 16 4.1 Successors and Assigns.......................................................................... 16 4.2 Governing Law................................................................................... 16 4.3 Counterparts.................................................................................... 16 4.4 Titles and Subtitles............................................................................ 16 4.5 Notices......................................................................................... 16 4.6 Expenses........................................................................................ 16 4.7 Amendments and Waivers.......................................................................... 17 4.8 Severability.................................................................................... 17 4.9 Aggregation of Stock............................................................................ 17 4.10 Entire Agreement................................................................................ 17
i 3 Schedule A Schedule of Investor ii 4 INVESTORS' RIGHTS AGREEMENT This Investors' Rights Agreement (this "Agreement") is made as of the 6th day of August, 1999, by and among USDATA Corporation, a Delaware corporation (the "Company"), Safeguard Delaware, Inc. (the "Investor"), and (for the limited purposes of Sections 2, 3 and 4 hereof) Safeguard Scientifics, Inc. ("Safeguard"). This Agreement shall become effective as of the Closing (as defined therein) of the transactions contemplated by that certain Stock Purchase Agreement dated as of even date herewith (the "Purchase Agreement") by and among the Company and the Investor. RECITALS WHEREAS, the Company and the Investor are parties to the Purchase Agreement; WHEREAS, the execution of this Agreement is a condition precedent to the Closing of the Purchase Agreement. WHEREAS, in order to induce the Company to enter into the Purchase Agreement and to induce the Investor to invest funds in the Company pursuant to the Purchase Agreement, the Investor and the Company hereby agree that this Agreement shall govern the rights of the Investor to cause the Company to register shares of Common Stock and certain other matters as set forth herein; AGREEMENT NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) the term "Act" means the Securities Act of 1933, as amended; (b) the term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 hereof; (c) the term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended; (d) the terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; 5 (e) the term "Registrable Securities" means the Common Stock issued and sold to the Investor pursuant to the Purchase Agreement and the Common Stock issuable or issued upon conversion of the Series A Preferred Stock issued and sold to the Investor pursuant to the Purchase Agreement, and any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of such shares of Common Stock; (f) the number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to any shares of Series A Preferred Stock which are, Registrable Securities; (g) the term "SEC" shall mean the Securities and Exchange Commission; (h) the term "Shelf Registration Period" shall have the meaning set forth in Section 1.2(b) hereof; and (i) the term "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 1.2 hereof which covers all of the Registrable Securities on Form S-3 or on another appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case, including the prospectus contained therein, all exhibits thereto and all documents incorporated or deemed to be incorporated by reference therein. 1.2 SHELF REGISTRATION. (a) The Company shall prepare and, not later than the first anniversary of the date hereof, shall file with the SEC a Shelf Registration Statement with respect to resales of the Registrable Securities from time to time in accordance with the methods of distribution elected by the Holders of the Registrable Securities and set forth in such Shelf Registration Statement and thereafter shall use its best efforts to cause such Shelf Registration Statement to be declared effective under the Act prior to the first anniversary of the date hereof. The Company shall supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company for the Shelf Registration Statement, if required by the Act, the 1934 Act or the SEC. (b) The Company shall keep the Shelf Registration Statement continuously effective under the Act in order to permit the prospectus forming a part thereof to be usable by all Holders until the earliest of (i) the fifth anniversary of the date hereof, (ii) the date as of which all Registrable Securities have been transferred pursuant to Rule 144 under the Securities Act (or any similar provision then in force), and (iii) such date as of which all Registrable Securities have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall: (i) subject to Section 1.2(c), prepare and file with the SEC such amendments and post-effective amendments to the Shelf 2 6 Registration Statement as may be necessary to keep the Shelf Registration Statement continuously effective for the Shelf Registration Period; (ii) subject to Section 1.2(c), cause the related prospectus to be supplemented by any required supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Act; and (iii) comply in all material respects with the provisions of the Act with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Shelf Registration Statement as so amended or such prospectus as so supplemented. (c) The Company may suspend the use of the prospectus forming a part of the Shelf Registration Statement for two periods not to exceed an aggregate of 60 days in any twelve-month period for valid business reasons, to be determined by the Company in its reasonable judgment (not including avoidance of the Company's obligations hereunder), including, without limitation, the acquisition or divestiture of assets, public filings with the SEC, pending corporate developments and similar events. The Company shall provide written notice to the Holders of any such suspension. 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration on Form S-4 (or its successor) relating to an offering of shares in connection with any acquisition of any entity or business, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities or exercise of warrants which are also being registered) and the Registrable Securities have not theretofore been included in a Shelf Registration Statement pursuant to Section 1.2 that remains effective, the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. The obligations of the Company under this Section 1.3 with respect to any particular offering may be waived at any time upon the written consent of Holders a majority of the outstanding Registrable Securities. The right of any Holder to request inclusion of Registrable Securities held by it in any registration pursuant to this Section 1.3 shall terminate if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder are eligible to be sold under Rule 144 under the Act during any 90-day period. In any event, such right shall terminate on the fifth anniversary of the date hereof. 1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become 3 7 effective, and in the case of a registration under Section 1.3 or 1.14 hereof, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to 120 days or, if earlier, until the distribution contemplated in such registration statement has been completed; provided, however, that such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions in which it is not, at the time, so qualified or otherwise subject itself to general taxation in any such states or jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering, it being understood and agreed that each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) notify each Holder of Registrable Securities covered by such registration statement in writing at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (i) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any such registration statement or the lifting of any suspension of the 4 8 qualification (or exemption from qualification) of any of the Registrable Securities for offer or sale in any jurisdiction at the earliest possible time; and (j) cooperate in all necessary respects with (A) counsel in preparation of the customary legal opinions and (B) accountants in preparation of the customary comfort letters. 1.5 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.6 EXPENSES OF SHELF REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements, which shall not exceed $25,000, of one counsel for the selling Holders (to be selected by the Holders holding a majority of the Registrable Securities) shall be borne and paid by the Company. 1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.13), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the fees and disbursements, which shall not exceed $25,000, of one counsel for the selling Holders (to be selected by the holders of a majority of the Registrable Securities to be registered), but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock under Section 1.3, the Company shall not be required to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not, jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering. The securities so included shall be apportioned (a) first to Holders selling Registrable Securities pro rata according to the total amount of Registrable Securities entitled to be included therein owned by each selling Holder and (b) second, to the extent determined by the underwriters to be compatible with the offering, to other stockholders. 5 9 1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) to the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to: (x) amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); (y) any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; (z) any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon such Holder's or underwriter's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto; (b) to the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or 6 10 action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.10(b) exceed the gross proceeds from the offering received by such Holder; (c) promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10; (d) if the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall any contribution by a Holder under this subsection 1.10(d) exceed the gross proceeds from the offering received by such Holder. In no event shall a person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) be entitled to contribution from any person or entity who was not guilty of fraudulent misrepresentation; (e) notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; and 7 11 (f) the obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. The Company shall cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the 1934 Act, shall comply in all respects with its reporting and filing obligations under the 1934 Act, and shall not take any action or file any document (whether or not permitted by the 1934 Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the 1934 Act. The Company shall take all action necessary to continue the listing or trading of its Common Stock on any national securities exchange or the Automated Quotation System of the National Association of Securities Dealers on which Common Stock is listed or traded, and shall comply in all respects with its reporting, filing and other obligations under the bylaws or rules of such exchange or association. The Company will furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Act and the 1934 Act or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 under the Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents as are filed by the Company under the 1934 Act, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to (a) any partner or retired partner of any holder which is a partnership, (b) any family member or trust for the benefit of any individual holder, or (c) any transferee or assignee who, after such assignment or transfer, holds at least 15% of the then outstanding Registrable Securities, provided: (i) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (ii) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; and (iii) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to interfere with or otherwise limit a Holder's registration rights under this Agreement. 1.14 REQUEST FOR REGISTRATION. (a) If the Company shall at any time during the Shelf Registration Period be ineligible to use Form S-3 or Form S-3 shall be for any reason unavailable to register the 8 12 Registrable Securities under the rules and regulation of the SEC, and the duration of such ineligibility or unavailability exceeds or is expected to exceed 60 days, the Holders shall have the right by a written request from the Holders of a majority of the Registrable Securities then outstanding to the Company, to require the Company to file a registration statement under the Act covering the resales of at least 25% of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $10,000,000). Upon its receipt of such a written request, the Company shall given written notice of such request to all Holders within ten days thereof. The Company shall file as soon as practicable, and in any event within 90 days of the receipt of such request, a registration statement under the Act covering resales of all Registrable Securities which Holders request to be registered, subject to the limitations of subsection 1.14(b). (b) If the Holders initiating the registration request hereunder (the "Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection 1.14(a) and the Company shall include such information in the written notice referred to in subsection 1.14(a). The managing underwriter shall be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.14, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder. (c) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.14(a) after the Company has effected two registrations pursuant to this Section 1.14(a) and such registrations have been declared or ordered effective; provided however, that a registration will not count as a registration pursuant to this Section 1.14(a) unless the Holders requesting registration are able to register the offering of and sell at least 50% of the shares of Registrable Securities that they have requested be included in such registration. 2. RIGHTS OFFERING. 2.1 RIGHTS. (a) As used herein, the term "Subsidiary" shall mean, with respect to the Company, any direct or indirect subsidiary of the Company more than 50% of the outstanding voting securities of which are owned directly or indirectly by the Company. The Company shall, 9 13 upon receipt of a Rights Offering Notice (as defined below), cause the Subsidiary designated as the "Relevant Subsidiary" in connection therewith (the "Relevant Subsidiary"), to grant to the holders of the common stock of Safeguard rights (the "Rights") to purchase from such Relevant Subsidiary such number of shares of such Relevant Subsidiary's common stock as determined by Safeguard up to a maximum of 40% of the sum of (i) all issued shares of common stock of such Relevant Subsidiary, and (ii) all shares of common stock of such Relevant Subsidiary subject to issuance pursuant to options, warrants or other agreements, plans, instruments or understandings, all as of the effective date of the registration statement relating to such Rights (the "Rights Registration Statement"). The Rights shall be issued in an offering (the "Rights Offering") pursuant to the Rights Registration Statement, shall be exercisable for a period of no greater than 45 days after the commencement of the Rights Offering and shall be transferable by the holder thereof during that period. The Company shall cause the Relevant Subsidiary to engage an investment banking firm selected by the Company, subject to the reasonable approval of Safeguard, which firm shall underwrite, on a standby, firm commitment basis, any portion of the offered common stock of the Relevant Subsidiary not purchased through the exercise of Rights. The Company shall also engage legal counsel selected by Safeguard, subject to the reasonable approval of a majority of the Board of Directors of the Company, which counsel shall represent the Relevant Subsidiary in connection with the conduct of the Rights Offering. The exercise price of the Rights shall be determined by negotiation among the Relevant Subsidiary, the underwriters and the selling stockholders, if any. Prior to the commencement of the Rights Offering, the Company shall use its best efforts to cause (and shall cause the Relevant Subsidiary to use its best efforts to cause) any holder of more than 1% of the Relevant Subsidiary's common stock (or rights to acquire more than 1% of the Relevant Subsidiary's common stock) and the Relevant Subsidiary's officers and directors to execute and deliver to the underwriter of the Rights Offering a market stand-off agreement. Such market stand-off agreement shall provide that, during the period of duration specified by the Relevant Subsidiary and the underwriter of common stock or other securities of the Relevant Subsidiary following the effective date of the Rights Registration Statement, such persons shall not, to the extent requested by the Relevant Subsidiary and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Relevant Subsidiary held by them at any time during such period except common stock included in such Rights Registration Statement. (b) Safeguard may initiate a Rights Offering with respect to any Subsidiary by giving written notice to the Company (a "Rights Offering Notice") at any time during the Rights Exclusivity Period (as hereinafter defined) at such time as the total market value of such Subsidiary is at least $35,000,000, which determination shall be made in good faith, upon request by Safeguard from time to time, by the Board with the assistance and advice of such experts or consultants as the Board may choose to retain, if any. The obligations of the Company pursuant to this Section 2.1 shall commence on the date hereof and expire on August 6, 2004 (such period, the "Rights Exclusivity Period"), unless a registration statement relating to a Rights Offering has been filed with the SEC by such date, in which case the Rights covered by such Registration Statement shall not expire until 150 days after the date such filing was made. (c) The Company agrees that it will not (i) sell or otherwise transfer any of the capital stock of any Subsidiary owned by it, (ii) permit any Subsidiary to merge or consolidate 10 14 with any other person or entity other than the Company or another Subsidiary or sell, lease or otherwise transfer any substantial portion of any Subsidiary's assets, or (iii) permit any Subsidiary to undertake any registration of any of its securities under the Act or the 1934 Act other than pursuant to this Section 2.1, in any case, prior to the earlier of the expiration of the Rights Exclusivity Period or the completion of a Rights Offering with respect to such Subsidiary, except with the consent of Safeguard. (d) Upon closing of a Rights Offering with respect to any Subsidiary, Safeguard's right to require such Subsidiary to conduct any further Rights Offerings under this Section 2 and any Directed Shares Offering under Section 3 below shall terminate. 2.2 SPLIT. After Safeguard has notified the Company of its intention to commence a Rights Offering, the Company shall, prior to the filing of the Rights Registration Statement with respect thereto as provided hereinafter (or at such earlier date as agreed to by the Company and Safeguard), take all such actions as shall be necessary to cause the Relevant Subsidiary to cause a split of its authorized common stock in such ratio as Safeguard shall determine. All references to share amounts in this Agreement other than as specifically noted shall be deemed to refer to share amounts prior to such split. 2.3 REGISTRATION STATEMENT. Upon notice by Safeguard to the Company of its intention to commence a Rights Offering, the Company shall cause the Relevant Subsidiary to promptly prepare a Rights Registration Statement to register under the Act, the Rights and the shares of the common stock of the Relevant Subsidiary to be acquired upon exercise of the Rights (the "Rights Shares"). The Company covenants that such Rights Registration Statement and the prospectus included therein shall be in form reasonably satisfactory to Safeguard, shall comply in all material respects with the Act and the rules and regulations of the SEC promulgated thereunder, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and shall conform with the provisions of Section 1.4 hereof. 2.4 REGISTRATION PROCESS. The Company shall use its best efforts to cause the Relevant Subsidiary to cause the Rights Registration Statement to be filed with the SEC and to become effective as promptly as practicable in accordance with Section 1.4 hereof. The Company shall cause the Relevant Subsidiary to prepare and file with the SEC, promptly upon Safeguard's request, any amendments or supplements to the Rights Registration Statement or the related prospectus that, in Safeguard's opinion, may be necessary or advisable in connection with the Rights Offering, subject to the reasonable approval of counsel for the Relevant Subsidiary. The Company shall not permit the Relevant Subsidiary to file any amendment or supplement to the Rights Registration Statement or the related prospectus unless (A) it has furnished Safeguard with a copy of such amendment or supplement a reasonable time prior to filing and (B) Safeguard has not reasonably objected to such amendment or supplement by notice to the Company within 10 days of receipt of such copy. The Company shall not issue (and shall not permit the Relevant Subsidiary to issue) any advertisement, press release, mailing or other solicitation material of which Safeguard reasonably disapproves by prompt written notice to the Company after receiving reasonable notice thereof. The Company shall cause the Relevant Subsidiary to comply with the Act and the rules and regulations thereunder in connection with 11 15 the Rights Offering and, until the termination of the Rights Offering, the Company shall cause the Relevant Subsidiary to use its best efforts to qualify the Rights Shares under the securities laws of all jurisdictions in which qualification is required and there are holders of Safeguard common stock and to continue such qualifications in effect during the exercise period of the Rights. At the time of mailing the prospectus relating to the Rights Offering and at the time of the closing of the Rights Offering, Safeguard shall be entitled to receive (A) from the Company and the Relevant Subsidiary such certificates and documents evidencing compliance with such representations and warranties of the Company and the Relevant Subsidiary as Safeguard shall reasonably request of the Company, and (B) from the counsel and independent accountants of the Company and the Relevant Subsidiary such opinions and documents as Safeguard may reasonably request thereof as if it were applicable to the Rights Offering. 2.5 USE OF PROCEEDS. The Company shall cause the Relevant Subsidiary to apply all proceeds of the Rights Offering first to the payment of the expenses of the Rights Offering and thereafter to general working capital purposes or such other purposes as shall be described in the related prospectus and agreed to by Safeguard. 2.6 REGISTRATION SERVICES. (a) Services. Safeguard shall diligently and in a timely fashion assist the Company and the Relevant Subsidiary in structuring the Rights Offering, in preparing the necessary registration statement and related disclosure documentation, in clearing the Rights Offering with the SEC and applicable state securities authorities and shall provide such other services and assistance in connection with the Rights Offering as the Company or the Relevant Subsidiary shall reasonably request. Nothing contained herein shall require Safeguard to provide to the Company or the Relevant Subsidiary any services or assistance which, if rendered by Safeguard, would require Safeguard to register as a broker-dealer under Section 15 of the Exchange Act or any state securities laws, or as an investment adviser under the Investment Advisor Act of 1940, as amended. (b) Working Group. The Company shall cause the counsel, auditors, employees, officers and consultants of the Company and the Relevant Subsidiary to render such assistance in consummating the Rights Offering, at the expense of the Company, as is customary in the consummation by a company of its initial public offering. In addition, in rendering services under this Section 2.6, Safeguard may engage special legal counsel, one or more rights, registrar and transfer agents, and such other consultants as Safeguard may deem necessary or desirable in connection with the Rights Offering, subject to the reasonable approval of the Company, the expenses of which shall be paid by the Company and which are not included in the reimbursement described in Subsection 2.6(c) below. In addition, Safeguard may require the Relevant Subsidiary to engage a registered broker-dealer of Safeguard's designation, subject to the reasonable approval of the Company, to provide such services in connection with the Rights Offering as Safeguard may deem reasonably necessary or desirable, including without limitation, to effect or underwrite the offering of the Rights or the Rights Shares in states in which applicable state laws require that a registered broker-dealer effect such offering. (c) Expenses. The Company shall bear all reasonable costs and expenses of the Rights Offering, including, but not limited to, the Relevant Subsidiary's printing, legal and 12 16 accounting fees and expenses, SEC and NASD filing fees and "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' discounts attributable to the Rights Shares not being offered and sold by the Relevant Subsidiary, or the fees and expenses of counsel for the selling holders of Rights Shares in connection with the registration of the Rights Shares if other than counsel to the Relevant Subsidiary. The Company shall reimburse Safeguard for its internal expenses incurred under this Section 2 by payment of $50,000 on a nonaccountable basis, such payment to be made on the earlier of the closing of the Rights Offering or 90 days after the Registration Statement is filed. 2.7 INDEMNIFICATION. In connection with the Rights Offering: (a) to the extent permitted by law, the Company will indemnify and hold harmless Safeguard, any underwriter (as defined in the Act) for Safeguard and each person, if any, who controls Safeguard or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company or the Relevant Subsidiary of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will pay to Safeguard and each underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.7(a) shall not apply to: (x) amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); (y) any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by Safeguard or the underwriter or controlling person; (z) any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon Safeguard's or the underwriter's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto; (b) to the extent permitted by law, Safeguard will indemnify and hold harmless the Relevant Subsidiary, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Relevant Subsidiary within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in 13 17 reliance upon and in conformity with written information furnished by Safeguard expressly for use in connection with such registration; and Safeguard will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 2.7(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Safeguard, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 2.7(b) exceed the gross public offering price of all such securities offered by Safeguard and sold pursuant to such registration statement; (c) promptly after receipt by an indemnified party under this Section 2.7(c) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.7; (d) if the indemnification provided for in this Section 2.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall any contribution by Safeguard under this subsection 2.7(d) exceed the gross public offering price of all such securities offered by Safeguard and sold pursuant to such registration statement. In no event shall a person or entity guilty of fraudulent misrepresentation (within the 14 18 meaning of Section 11(f) of the Act) be entitled to contribution from any person or entity who was not guilty of fraudulent misrepresentation; (e) notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; and (f) the obligations of the Company and Safeguard under this Section 2.7 shall survive the completion of the Rights Offering. 3. DIRECTED SHARES OFFERING. 3.1 DIRECTED SHARES REGISTRATION. Safeguard shall have the right to require the Company to cause any Subsidiary to file a registration statement on Form S-1 for the registration of shares of the Subsidiary's common stock pursuant to this Section 3 at such time as the total market value of such Subsidiary is at least $35,000,000 (the "Directed Shares Offering"). Such registration statement shall register common stock (i) sufficient in number to satisfy the Directed Shares requirement described below and (ii) with an aggregate offering price, prior to underwriting discounts and commissions, of at least $10,000,000. In connection with such Directed Shares Offering, the Company shall cause the applicable Subsidiary to adjust its authorized shares as requested by Safeguard in order to facilitate distribution of Directed Shares to its stockholders. The Company shall cause the applicable Subsidiary to engage (i) an underwriter or underwriters selected by Safeguard, subject to the reasonable approval of a majority of the Board of Directors of the Company, and (ii) legal counsel selected by Safeguard, subject to the reasonable approval of a majority of the Board of Directors of the Company, which counsel shall represent the applicable Subsidiary in connection with the conduct of the Directed Shares Offering. 3.2 DIRECTED SHARES SUBSCRIPTION PROGRAM. In connection with the Directed Shares Offering, the Company shall cause the applicable Subsidiary to: (a) provide in the related underwriting agreement a right for Safeguard to designate persons (the "Safeguard Designees") who may purchase from the underwriter(s) shares of the Relevant Subsidiary's common stock (the "Directed Shares") at the public offering price of such Subsidiary's common stock in the Directed Shares Offering (the "IPO Price"); and (b) use its best efforts to cause such Subsidiary to cause the underwriters of the Directed Shares Offering to allow the Safeguard Designees to purchase at the IPO Price that number of Directed Shares equal to the greater of (i) 20% of the shares of common stock offered by such Subsidiary in such Directed Shares Offering or (ii) 10% of the number of shares of Safeguard Common Stock outstanding on the record date set by Safeguard for distribution of Directed Shares (or subscription rights therefor) to its stockholders. Upon closing of the Directed Shares Offering with respect to any Subsidiary and sale of the number of shares set forth in this Section 3.2(b), Safeguard's right to require the Company to cause such Subsidiary to conduct a Rights Offering pursuant to Section 2 above shall terminate. The Company shall reimburse Safeguard for its internal expenses incurred under this Section 3 by payment of 15 19 $50,000 on a nonaccountable basis, such payment to be made on the earlier of the closing of the Directed Shares Offering or 90 days after the Registration Statement is filed. 4. MISCELLANEOUS. 4.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 4.2 GOVERNING LAW. The construction, validity and interpretation of this Agreement will be governed by the internal laws of the State of Delaware without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. 4.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 4.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial overnight courier (with confirmation of receipt) or sent via facsimile (with confirmation of receipt) (i) if to the Company, at USData Corporation, 2435 North Central Expressway, Richardson, Texas 75080 (fax: (972) 669-9557), Attention: Robert L. Drury, (ii) if to the Investor, at the address beneath the Investor's name on Schedule A attached hereto or (iii) if to Safeguard, at Safeguard Scientifics, Inc., 800 The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087 (fax: (610) 293-0601). Notice given by facsimile shall be confirmed by appropriate answer back and shall be effective upon actual receipt if received during the recipient's normal business hours, or at the beginning of the recipient's next business day after receipt if not received during the recipient's normal business hours. All notices by facsimile shall be confirmed promptly after transmission in writing by certified mail or personal delivery. Any party may change any address to which notice is to be given to it by giving notice as provided above of such change of address. 4.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 16 20 4.7 AMENDMENTS AND WAIVERS. Any term other than Sections 2 and 3 and the next sentence of this Agreement may be amended and the observance of any term other than Sections 2 and 3 and the next sentence of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the shares of Registrable Securities then outstanding. Sections 2 and 3 and this sentence of this Agreement may be amended and the observance of any term of Sections 2 and 3 and this sentence of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Safeguard. 4.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 4.9 AGGREGATION OF STOCK. All shares of securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 4.10 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. [Signature page follows.] 17 21 IN WITNESS WHEREOF, the parties have executed this Investors' Rights Agreement as of the date first above written. COMPANY: USDATA CORPORATION By: --------------------------------- Name: --------------------------------- Title: --------------------------------- INVESTOR: SAFEGUARD DELAWARE, INC. By: --------------------------------- Name: --------------------------------- Title: --------------------------------- OTHER PARTY: SAFEGUARD SCIENTIFICS, INC. (solely for the limited purpose of agreeing to Sections 2, 3 and 4 hereof) By: --------------------------------- Name: --------------------------------- Title: --------------------------------- [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 22 SCHEDULE A Investor Safeguard Delaware, Inc. c/o Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Fax: (610) 293-0601 EX-11.1 6 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share data)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Net loss applicable to common stockholders: Continuing operations $ (2,583) $ (2,094) $ (3,907) Discontinued operations -- (1,719) 217 -------- -------- -------- Net loss applicable to common stockholders $ (2,583) $ (3,813) $ (3,690) ======== ======== ======== Weighted average common shares outstanding: 11,849 11,196 11,066 Common share equivalents -- -- -- -------- -------- -------- Weighted average common shares and common share equivalents (if dilutive) outstanding 11,849 11,196 11,066 ======== ======== ======== Net loss per common share: Basic and diluted: Continuing operations $ (0.22) $ (0.19) $ (0.35) Discontinued operations -- (0.15) 0.02 -------- -------- -------- Net loss from continuing operations $ (0.22) $ (0.34) $ (0.33) ======== ======== ========
EX-23.1 7 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors USDATA Corporation: We consent to incorporation by reference in the registration statements on Form S-8 (Nos. 333-65505 and 333-82927) of USDATA Corporation of our report dated February 12, 2000, relating to the consolidated balance sheet of USDATA Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended, and the related financial statement schedule, which report appears in the December 31, 1999 annual report on Form 10-K of USDATA Corporation. KPMG LLP Dallas, Texas March 28, 2000 EX-23.2 8 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-65505 and 333-82927) of USDATA Corporation of our report dated February 12, 1999 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas March 30, 2000 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S DECEMBER 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,962 0 7,079 453 283 10,315 8,549 6,387 26,867 7,225 0 0 0 156 13,931 26,867 27,045 27,045 0 28,867 0 0 0 (1,708) 708 (2,416) 0 0 0 (2,583) (0.22) (0.22)
-----END PRIVACY-ENHANCED MESSAGE-----